Is ITEYES (KOSDAQ:372800) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that ITEYES Inc. (KOSDAQ:372800) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for ITEYES

What Is ITEYES's Debt?

The image below, which you can click on for greater detail, shows that ITEYES had debt of ₩11.0b at the end of September 2024, a reduction from ₩11.6b over a year. However, because it has a cash reserve of ₩402.6m, its net debt is less, at about ₩10.6b.

How Strong Is ITEYES' Balance Sheet?

We can see from the most recent balance sheet that ITEYES had liabilities of ₩28.0b falling due within a year, and liabilities of ₩313.3m due beyond that. On the other hand, it had cash of ₩402.6m and ₩3.34b worth of receivables due within a year. So it has liabilities totalling ₩24.5b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩27.7b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is ITEYES'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 ITEYES wasn't profitable at an EBIT level, but managed to grow its revenue by 6.9%, to ₩74b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months ITEYES produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩4.1b. 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. Another cause for caution is that is bled ₩6.9b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Be aware that ITEYES is showing 3 warning signs in our investment analysis , and 2 of those are potentially serious...

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.