Health Check: How Prudently Does Virnect (KOSDAQ:438700) 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.' 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. Importantly, Virnect Co., Ltd. (KOSDAQ:438700) does carry debt. But the more important question is: how much risk is that debt creating?

Our free stock report includes 4 warning signs investors should be aware of before investing in Virnect. Read for free now.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Virnect's Debt?

As you can see below, Virnect had ₩6.42b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩23.4b in cash to offset that, meaning it has ₩17.0b net cash.

How Strong Is Virnect's Balance Sheet?

We can see from the most recent balance sheet that Virnect had liabilities of ₩8.35b falling due within a year, and liabilities of ₩2.80b due beyond that. Offsetting this, it had ₩23.4b in cash and ₩888.2m in receivables that were due within 12 months. So it can boast ₩13.2b more liquid assets than total liabilities.

This excess liquidity suggests that Virnect is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Virnect has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Virnect's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Virnect

Over 12 months, Virnect made a loss at the EBIT level, and saw its revenue drop to ₩4.6b, which is a fall of 29%. That makes us nervous, to say the least.

So How Risky Is Virnect?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Virnect had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩11b and booked a ₩13b accounting loss. However, it has net cash of ₩17.0b, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 4 warning signs for Virnect (2 shouldn't be ignored) you should be aware of.

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.