Is Taihan Fiber Optics (KOSDAQ:010170) Using Too Much Debt?

Warren Buffett famously said, '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. As with many other companies Taihan Fiber Optics Co., Ltd (KOSDAQ:010170) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Taihan Fiber Optics

What Is Taihan Fiber Optics's Debt?

As you can see below, at the end of June 2024, Taihan Fiber Optics had ₩117.9b of debt, up from ₩111.4b a year ago. Click the image for more detail. On the flip side, it has ₩28.6b in cash leading to net debt of about ₩89.3b.

A Look At Taihan Fiber Optics' Liabilities

We can see from the most recent balance sheet that Taihan Fiber Optics had liabilities of ₩148.0b falling due within a year, and liabilities of ₩19.0b due beyond that. On the other hand, it had cash of ₩28.6b and ₩38.1b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩100.3b.

This deficit casts a shadow over the ₩57.6b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Taihan Fiber Optics would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Taihan Fiber Optics 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, Taihan Fiber Optics made a loss at the EBIT level, and saw its revenue drop to ₩149b, which is a fall of 29%. That makes us nervous, to say the least.

Caveat Emptor

While Taihan Fiber Optics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩34b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩21b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Taihan Fiber Optics (1 is a bit unpleasant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.