Is Datasolution (KOSDAQ:263800) Using Debt 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.' 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. Importantly, Datasolution, Inc. (KOSDAQ:263800) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Datasolution

What Is Datasolution's Net Debt?

The image below, which you can click on for greater detail, shows that Datasolution had debt of ₩2.40b at the end of June 2024, a reduction from ₩4.24b over a year. But it also has ₩7.67b in cash to offset that, meaning it has ₩5.27b net cash.

How Healthy Is Datasolution's Balance Sheet?

According to the last reported balance sheet, Datasolution had liabilities of ₩26.6b due within 12 months, and liabilities of ₩2.66b due beyond 12 months. On the other hand, it had cash of ₩7.67b and ₩3.44b worth of receivables due within a year. So it has liabilities totalling ₩18.1b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Datasolution is worth ₩78.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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. 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.

Over 12 months, Datasolution made a loss at the EBIT level, and saw its revenue drop to ₩91b, which is a fall of 6.2%. We would much prefer see growth.

So How Risky Is Datasolution?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Datasolution had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩18b of cash and made a loss of ₩9.5m. With only ₩5.27b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 2 warning signs for Datasolution 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.