iCRAFT (KOSDAQ:052460) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that iCRAFT Co., Ltd. (KOSDAQ:052460) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for iCRAFT

What Is iCRAFT's Debt?

As you can see below, iCRAFT had ₩7.60b of debt at June 2024, down from ₩17.4b a year prior. But on the other hand it also has ₩16.3b in cash, leading to a ₩8.65b net cash position.

A Look At iCRAFT's Liabilities

Zooming in on the latest balance sheet data, we can see that iCRAFT had liabilities of ₩24.7b due within 12 months and liabilities of ₩5.60b due beyond that. On the other hand, it had cash of ₩16.3b and ₩15.0b worth of receivables due within a year. So it actually has ₩929.6m more liquid assets than total liabilities.

This short term liquidity is a sign that iCRAFT could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that iCRAFT has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that iCRAFT grew its EBIT by 158% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is iCRAFT's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While iCRAFT has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, iCRAFT actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case iCRAFT has ₩8.65b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 104% of that EBIT to free cash flow, bringing in ₩23b. So we don't think iCRAFT's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for iCRAFT you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.