Is RSUPPORT (KOSDAQ:131370) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, RSUPPORT Co., Ltd. (KOSDAQ:131370) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for RSUPPORT

What Is RSUPPORT's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 RSUPPORT had debt of ₩13.3b, up from none in one year. However, its balance sheet shows it holds ₩32.4b in cash, so it actually has ₩19.1b net cash.

How Strong Is RSUPPORT's Balance Sheet?

We can see from the most recent balance sheet that RSUPPORT had liabilities of ₩26.7b falling due within a year, and liabilities of ₩3.46b due beyond that. Offsetting this, it had ₩32.4b in cash and ₩6.56b in receivables that were due within 12 months. So it can boast ₩8.83b more liquid assets than total liabilities.

This short term liquidity is a sign that RSUPPORT could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, RSUPPORT boasts net cash, so it's fair to say it does not have a heavy debt load!

While RSUPPORT doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is RSUPPORT'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. RSUPPORT may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, RSUPPORT saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that RSUPPORT has net cash of ₩19.1b, as well as more liquid assets than liabilities. So we don't have any problem with RSUPPORT's use of debt. 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. For example RSUPPORT has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.