Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Virnect Co., Ltd. (KOSDAQ:438700) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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.
Check out our latest analysis for Virnect
How Much Debt Does Virnect Carry?
The chart below, which you can click on for greater detail, shows that Virnect had ₩6.55b in debt in June 2024; about the same as the year before. But it also has ₩25.7b in cash to offset that, meaning it has ₩19.2b net cash.
A Look At Virnect's Liabilities
Zooming in on the latest balance sheet data, we can see that Virnect had liabilities of ₩3.79b due within 12 months and liabilities of ₩7.39b due beyond that. Offsetting this, it had ₩25.7b in cash and ₩686.9m in receivables that were due within 12 months. So it can boast ₩15.2b more liquid assets than total liabilities.
This excess liquidity is a great indication that Virnect's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Virnect has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Virnect will need earnings to service that debt. 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.
Over 12 months, Virnect reported revenue of ₩6.3b, which is a gain of 22%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Virnect?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Virnect had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩12b of cash and made a loss of ₩11b. But at least it has ₩19.2b on the balance sheet to spend on growth, near-term. Virnect's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Virnect , and understanding them should be part of your investment process.
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.
About KOSDAQ:A438700
Excellent balance sheet very low.
