Is Softcen (KOSDAQ:032680) Using Debt In A Risky Way?

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.' 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. We can see that Softcen Co., Ltd. (KOSDAQ:032680) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Softcen

What Is Softcen's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Softcen had ₩22.8b of debt in June 2024, down from ₩24.1b, one year before. However, it does have ₩48.9b in cash offsetting this, leading to net cash of ₩26.2b.

A Look At Softcen's Liabilities

The latest balance sheet data shows that Softcen had liabilities of ₩55.8b due within a year, and liabilities of ₩444.4m falling due after that. Offsetting this, it had ₩48.9b in cash and ₩7.92b in receivables that were due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Softcen's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩36.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Softcen boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Softcen'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.

In the last year Softcen had a loss before interest and tax, and actually shrunk its revenue by 17%, to ₩62b. That's not what we would hope to see.

So How Risky Is Softcen?

Although Softcen had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩12b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Softcen (of which 1 is concerning!) you should know about.

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.