Health Check: How Prudently Does ISAAC EngineeringLtd (KOSDAQ:351330) Use Debt?

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. As with many other companies ISAAC Engineering Co.,Ltd (KOSDAQ:351330) makes use of debt. But the real question is whether this debt is making the company risky.

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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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does ISAAC EngineeringLtd Carry?

The image below, which you can click on for greater detail, shows that ISAAC EngineeringLtd had debt of ₩4.86b at the end of December 2024, a reduction from ₩10.8b over a year. But it also has ₩11.7b in cash to offset that, meaning it has ₩6.88b net cash.

How Healthy Is ISAAC EngineeringLtd's Balance Sheet?

According to the last reported balance sheet, ISAAC EngineeringLtd had liabilities of ₩27.1b due within 12 months, and liabilities of ₩225.5m due beyond 12 months. Offsetting this, it had ₩11.7b in cash and ₩20.1b in receivables that were due within 12 months. So it can boast ₩4.49b more liquid assets than total liabilities.

This surplus suggests that ISAAC EngineeringLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ISAAC EngineeringLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since ISAAC EngineeringLtd 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.

Check out our latest analysis for ISAAC EngineeringLtd

In the last year ISAAC EngineeringLtd had a loss before interest and tax, and actually shrunk its revenue by 32%, to ₩68b. That makes us nervous, to say the least.

So How Risky Is ISAAC EngineeringLtd?

While ISAAC EngineeringLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩6.8b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. 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 ISAAC EngineeringLtd (of which 1 is a bit unpleasant!) 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.