Is Osangjaiel (KOSDAQ:053980) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Osangjaiel Co., Ltd. (KOSDAQ:053980) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Osangjaiel

How Much Debt Does Osangjaiel Carry?

The chart below, which you can click on for greater detail, shows that Osangjaiel had ₩15.8b in debt in September 2020; about the same as the year before. On the flip side, it has ₩7.17b in cash leading to net debt of about ₩8.63b.

How Strong Is Osangjaiel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Osangjaiel had liabilities of ₩35.5b due within 12 months and liabilities of ₩33.5m due beyond that. Offsetting this, it had ₩7.17b in cash and ₩14.7b in receivables that were due within 12 months. So its liabilities total ₩13.7b more than the combination of its cash and short-term receivables.

Since publicly traded Osangjaiel shares are worth a total of ₩121.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Osangjaiel 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 Osangjaiel wasn't profitable at an EBIT level, but managed to grow its revenue by 4.6%, to ₩73b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Osangjaiel had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩4.1b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₩1.3b and the profit of ₩7.3b. So one might argue that there's still a chance it can get things on the right track. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Osangjaiel you should be aware of.

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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