Is Datasolution (KOSDAQ:263800) Using Debt In A Risky Way?

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.' 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 note that Datasolution, Inc. (KOSDAQ:263800) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Datasolution

What Is Datasolution's Debt?

You can click the graphic below for the historical numbers, but it shows that Datasolution had ₩2.65b of debt in September 2020, down from ₩16.0b, one year before. But it also has ₩14.3b in cash to offset that, meaning it has ₩11.7b net cash.

How Healthy Is Datasolution's Balance Sheet?

The latest balance sheet data shows that Datasolution had liabilities of ₩18.2b due within a year, and liabilities of ₩1.18b falling due after that. Offsetting these obligations, it had cash of ₩14.3b as well as receivables valued at ₩5.64b due within 12 months. So it actually has ₩595.2m more liquid assets than total liabilities.

Having regard to Datasolution's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩114.3b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Datasolution has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Datasolution 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.

In the last year Datasolution had a loss before interest and tax, and actually shrunk its revenue by 26%, to ₩80b. That makes us nervous, to say the least.

So How Risky Is Datasolution?

While Datasolution lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩119m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 be aware of the 1 warning sign we've spotted with Datasolution .

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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