Here's Why Bitnine Co (KOSDAQ:357880) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Bitnine Co, Ltd. (KOSDAQ:357880) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Bitnine Co

What Is Bitnine Co's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Bitnine Co had ₩20.3b of debt, an increase on ₩17.7b, over one year. However, because it has a cash reserve of ₩11.5b, its net debt is less, at about ₩8.88b.

How Healthy Is Bitnine Co's Balance Sheet?

According to the last reported balance sheet, Bitnine Co had liabilities of ₩40.6b due within 12 months, and liabilities of ₩1.88b due beyond 12 months. Offsetting these obligations, it had cash of ₩11.5b as well as receivables valued at ₩11.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩19.2b.

Bitnine Co has a market capitalization of ₩47.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Bitnine Co 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.

In the last year Bitnine Co wasn't profitable at an EBIT level, but managed to grow its revenue by 45%, to ₩28b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Bitnine Co managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping ₩13b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₩10b of cash over the last year. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 2 warning signs for Bitnine Co (1 shouldn't be ignored) you should be aware of.

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.