Is CoAsia (KOSDAQ:045970) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, CoAsia Corporation (KOSDAQ:045970) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CoAsia

What Is CoAsia's Net Debt?

The image below, which you can click on for greater detail, shows that CoAsia had debt of ₩122.3b at the end of September 2024, a reduction from ₩132.5b over a year. However, it does have ₩91.0b in cash offsetting this, leading to net debt of about ₩31.3b.

A Look At CoAsia's Liabilities

According to the last reported balance sheet, CoAsia had liabilities of ₩148.9b due within 12 months, and liabilities of ₩83.8b due beyond 12 months. Offsetting this, it had ₩91.0b in cash and ₩41.4b in receivables that were due within 12 months. So its liabilities total ₩100.2b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩104.5b, so it does suggest shareholders should keep an eye on CoAsia's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CoAsia will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CoAsia had a loss before interest and tax, and actually shrunk its revenue by 9.8%, to ₩360b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months CoAsia produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₩24b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩30b of cash over the last year. So suffice it to say we consider the stock very risky. 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 example CoAsia has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.