Is Taihan Fiber Optics (KOSDAQ:010170) A Risky Investment?

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.' 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. As with many other companies Taihan Fiber Optics Co., Ltd (KOSDAQ:010170) makes use of debt. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Taihan Fiber Optics

What Is Taihan Fiber Optics's Debt?

As you can see below, Taihan Fiber Optics had ₩113.2b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩40.3b in cash offsetting this, leading to net debt of about ₩72.9b.

How Healthy Is Taihan Fiber Optics' Balance Sheet?

According to the last reported balance sheet, Taihan Fiber Optics had liabilities of ₩147.7b due within 12 months, and liabilities of ₩19.6b due beyond 12 months. On the other hand, it had cash of ₩40.3b and ₩35.9b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩91.1b.

This deficit is considerable relative to its market capitalization of ₩91.8b, so it does suggest shareholders should keep an eye on Taihan Fiber Optics' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Taihan Fiber Optics'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.

Over 12 months, Taihan Fiber Optics made a loss at the EBIT level, and saw its revenue drop to ₩149b, which is a fall of 31%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Taihan Fiber Optics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩35b at the EBIT level. 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. Another cause for caution is that is bled ₩449m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Taihan Fiber Optics (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com