Is ESTsoft (KOSDAQ:047560) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that ESTsoft Corp. (KOSDAQ:047560) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ESTsoft

How Much Debt Does ESTsoft Carry?

As you can see below, ESTsoft had ₩29.9b of debt at June 2024, down from ₩42.9b a year prior. However, its balance sheet shows it holds ₩91.2b in cash, so it actually has ₩61.2b net cash.

A Look At ESTsoft's Liabilities

Zooming in on the latest balance sheet data, we can see that ESTsoft had liabilities of ₩64.6b due within 12 months and liabilities of ₩34.8b due beyond that. Offsetting these obligations, it had cash of ₩91.2b as well as receivables valued at ₩15.0b due within 12 months. So it actually has ₩6.88b more liquid assets than total liabilities.

This surplus suggests that ESTsoft has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ESTsoft has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ESTsoft will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year ESTsoft wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to ₩102b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is ESTsoft?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ESTsoft had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩2.6b and booked a ₩13b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩61.2b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with ESTsoft (including 1 which makes us a bit uncomfortable) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.