Is Innosimulation (KOSDAQ:274400) 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.' 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. As with many other companies Innosimulation Co., Ltd (KOSDAQ:274400) makes use of debt. But the more important question is: how much risk is that debt creating?

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 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.

See our latest analysis for Innosimulation

What Is Innosimulation's Net Debt?

The image below, which you can click on for greater detail, shows that Innosimulation had debt of ₩17.9b at the end of March 2024, a reduction from ₩20.6b over a year. However, because it has a cash reserve of ₩7.07b, its net debt is less, at about ₩10.8b.

How Strong Is Innosimulation's Balance Sheet?

The latest balance sheet data shows that Innosimulation had liabilities of ₩6.55b due within a year, and liabilities of ₩14.4b falling due after that. On the other hand, it had cash of ₩7.07b and ₩4.47b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩9.44b.

Of course, Innosimulation has a market capitalization of ₩54.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Innosimulation 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, Innosimulation reported revenue of ₩19b, which is a gain of 2.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Innosimulation produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩197m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩3.7b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Innosimulation .

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.

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