Health Check: How Prudently Does TOBESOFT (KOSDAQ:079970) Use Debt?

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.' 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. We note that TOBESOFT Co., Ltd. (KOSDAQ:079970) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for TOBESOFT

What Is TOBESOFT's Debt?

You can click the graphic below for the historical numbers, but it shows that TOBESOFT had ₩24.6b of debt in September 2024, down from ₩31.8b, one year before. However, because it has a cash reserve of ₩3.37b, its net debt is less, at about ₩21.3b.

How Healthy Is TOBESOFT's Balance Sheet?

According to the last reported balance sheet, TOBESOFT had liabilities of ₩37.8b due within 12 months, and liabilities of ₩1.64b due beyond 12 months. Offsetting these obligations, it had cash of ₩3.37b as well as receivables valued at ₩3.58b due within 12 months. So it has liabilities totalling ₩32.5b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩8.54b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, TOBESOFT would probably need a major re-capitalization if its creditors were to demand repayment. 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 TOBESOFT 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.

Over 12 months, TOBESOFT made a loss at the EBIT level, and saw its revenue drop to ₩37b, which is a fall of 20%. That makes us nervous, to say the least.

Caveat Emptor

While TOBESOFT's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩19b. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of ₩26b in the last year. So we think this stock is quite risky. We'd prefer to pass. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for TOBESOFT (2 make us uncomfortable) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.