Is ELUON (KOSDAQ:065440) Using Too Much Debt?

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.' 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 ELUON Corporation (KOSDAQ:065440) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 ELUON

What Is ELUON's Net Debt?

The chart below, which you can click on for greater detail, shows that ELUON had ₩5.03b in debt in September 2024; about the same as the year before. But on the other hand it also has ₩40.6b in cash, leading to a ₩35.6b net cash position.

How Healthy Is ELUON's Balance Sheet?

According to the last reported balance sheet, ELUON had liabilities of ₩16.3b due within 12 months, and liabilities of ₩2.74b due beyond 12 months. On the other hand, it had cash of ₩40.6b and ₩4.01b worth of receivables due within a year. So it actually has ₩25.6b more liquid assets than total liabilities.

This excess liquidity is a great indication that ELUON's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that ELUON has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, ELUON grew its EBIT by 806% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ELUON 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While ELUON 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, ELUON actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ELUON has net cash of ₩35.6b, as well as more liquid assets than liabilities. The cherry on top was that in converted 105% of that EBIT to free cash flow, bringing in ₩9.0b. At the end of the day we're not concerned about ELUON's debt. 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. For example - ELUON has 1 warning sign we think 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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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.