Here's Why WISE iTech (KOSDAQ:065370) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies WISE iTech Co., Ltd. (KOSDAQ:065370) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for WISE iTech

What Is WISE iTech's Debt?

You can click the graphic below for the historical numbers, but it shows that WISE iTech had ₩10.8b of debt in December 2023, down from ₩13.9b, one year before. On the flip side, it has ₩2.98b in cash leading to net debt of about ₩7.87b.

How Strong Is WISE iTech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that WISE iTech had liabilities of ₩17.2b due within 12 months and liabilities of ₩645.0m due beyond that. Offsetting this, it had ₩2.98b in cash and ₩1.51b in receivables that were due within 12 months. So its liabilities total ₩13.4b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because WISE iTech is worth ₩52.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is WISE iTech's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, WISE iTech made a loss at the EBIT level, and saw its revenue drop to ₩28b, which is a fall of 27%. That makes us nervous, to say the least.

Caveat Emptor

While WISE iTech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩2.9b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩4.4b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example WISE iTech has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.