Datasolution (KOSDAQ:263800) Seems To Use Debt Quite Sensibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Datasolution, Inc. (KOSDAQ:263800) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Datasolution

What Is Datasolution's Net Debt?

As you can see below, Datasolution had ₩3.77b of debt at December 2023, down from ₩7.61b a year prior. But on the other hand it also has ₩25.1b in cash, leading to a ₩21.3b net cash position.

A Look At Datasolution's Liabilities

Zooming in on the latest balance sheet data, we can see that Datasolution had liabilities of ₩42.2b due within 12 months and liabilities of ₩3.49b due beyond that. Offsetting this, it had ₩25.1b in cash and ₩19.1b in receivables that were due within 12 months. So it has liabilities totalling ₩1.46b more than its cash and near-term receivables, combined.

This state of affairs indicates that Datasolution's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩98.1b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Datasolution also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Datasolution's load is not too heavy, because its EBIT was down 52% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Datasolution's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Datasolution 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, Datasolution actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Datasolution has ₩21.3b in net cash. And it impressed us with free cash flow of -₩421m, being 235% of its EBIT. So we are not troubled with Datasolution's debt use. 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. To that end, you should learn about the 4 warning signs we've spotted with Datasolution (including 2 which are a bit concerning) .

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.