We Think InnorulesLtd (KOSDAQ:296640) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Innorules Co.,Ltd (KOSDAQ:296640) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for InnorulesLtd

How Much Debt Does InnorulesLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 InnorulesLtd had ₩6.23b of debt, an increase on ₩129.5m, over one year. However, it does have ₩23.7b in cash offsetting this, leading to net cash of ₩17.5b.

A Look At InnorulesLtd's Liabilities

We can see from the most recent balance sheet that InnorulesLtd had liabilities of ₩10.2b falling due within a year, and liabilities of ₩964.0m due beyond that. Offsetting this, it had ₩23.7b in cash and ₩3.41b in receivables that were due within 12 months. So it can boast ₩16.0b more liquid assets than total liabilities.

This excess liquidity is a great indication that InnorulesLtd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that InnorulesLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Although InnorulesLtd made a loss at the EBIT level, last year, it was also good to see that it generated ₩838m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since InnorulesLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. InnorulesLtd 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. Happily for any shareholders, InnorulesLtd actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that InnorulesLtd has net cash of ₩17.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩1.4b, being 164% of its EBIT. So is InnorulesLtd's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for InnorulesLtd (of which 1 is a bit unpleasant!) 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.