Is VAIV (KOSDAQ:301300) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, VAIV company Inc. (KOSDAQ:301300) does carry debt. But the more important question is: how much risk is that debt creating?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for VAIV

What Is VAIV's Net Debt?

You can click the graphic below for the historical numbers, but it shows that VAIV had ₩34.2b of debt in June 2024, down from ₩40.9b, one year before. However, it does have ₩8.78b in cash offsetting this, leading to net debt of about ₩25.4b.

A Look At VAIV's Liabilities

According to the last reported balance sheet, VAIV had liabilities of ₩26.4b due within 12 months, and liabilities of ₩24.1b due beyond 12 months. Offsetting this, it had ₩8.78b in cash and ₩2.18b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩39.6b.

This deficit is considerable relative to its market capitalization of ₩45.3b, so it does suggest shareholders should keep an eye on VAIV's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is VAIV'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.

In the last year VAIV wasn't profitable at an EBIT level, but managed to grow its revenue by 8.9%, to ₩30b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, VAIV had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩7.6b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩18b of cash over the last year. So in short it's a really risky stock. 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. For example VAIV has 3 warning signs (and 2 which are potentially serious) we think you should know about.

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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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.