The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that ISAAC Engineering Co.,Ltd (KOSDAQ:351330) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for ISAAC EngineeringLtd
What Is ISAAC EngineeringLtd's Net Debt?
The image below, which you can click on for greater detail, shows that ISAAC EngineeringLtd had debt of ₩4.86b at the end of September 2024, a reduction from ₩18.0b over a year. But on the other hand it also has ₩9.08b in cash, leading to a ₩4.22b net cash position.
How Healthy Is ISAAC EngineeringLtd's Balance Sheet?
The latest balance sheet data shows that ISAAC EngineeringLtd had liabilities of ₩18.9b due within a year, and liabilities of ₩169.1m falling due after that. On the other hand, it had cash of ₩9.08b and ₩7.07b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩2.94b.
Since publicly traded ISAAC EngineeringLtd shares are worth a total of ₩60.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, ISAAC EngineeringLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
Over 12 months, ISAAC EngineeringLtd made a loss at the EBIT level, and saw its revenue drop to ₩76b, which is a fall of 15%. We would much prefer see growth.
So How Risky Is ISAAC EngineeringLtd?
Although ISAAC EngineeringLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩16b. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 2 warning signs for ISAAC EngineeringLtd you should be aware of, and 1 of them is a bit unpleasant.
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.
About KOSDAQ:A351330
ISAAC EngineeringLtd
An engineering service company, provides optimal solutions for process and factory automation.
Excellent balance sheet and slightly overvalued.