Is ESTsoft (KOSDAQ:047560) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ESTsoft

How Much Debt Does ESTsoft Carry?

The image below, which you can click on for greater detail, shows that ESTsoft had debt of ₩31.6b at the end of December 2023, a reduction from ₩39.6b over a year. But it also has ₩76.0b in cash to offset that, meaning it has ₩44.4b net cash.

How Healthy Is ESTsoft's Balance Sheet?

The latest balance sheet data shows that ESTsoft had liabilities of ₩57.6b due within a year, and liabilities of ₩29.3b falling due after that. Offsetting these obligations, it had cash of ₩76.0b as well as receivables valued at ₩13.0b due within 12 months. So it actually has ₩2.04b more liquid assets than total liabilities.

This state of affairs indicates that ESTsoft's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩277.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that ESTsoft has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ESTsoft will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year ESTsoft wasn't profitable at an EBIT level, but managed to grow its revenue by 4.2%, to ₩92b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is ESTsoft?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months ESTsoft lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩7.0b of cash and made a loss of ₩6.2b. While this does make the company a bit risky, it's important to remember it has net cash of ₩44.4b. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for ESTsoft (1 is significant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.