Is CammSys (KOSDAQ:050110) Using Too Much Debt?

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. We note that CammSys Corp. (KOSDAQ:050110) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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 CammSys

How Much Debt Does CammSys Carry?

The image below, which you can click on for greater detail, shows that at June 2020 CammSys had debt of ₩131.6b, up from ₩95.1b in one year. On the flip side, it has ₩83.2b in cash leading to net debt of about ₩48.4b.

How Strong Is CammSys's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CammSys had liabilities of ₩210.7b due within 12 months and liabilities of ₩23.6b due beyond that. Offsetting these obligations, it had cash of ₩83.2b as well as receivables valued at ₩75.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩75.4b.

CammSys has a market capitalization of ₩190.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is CammSys'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, CammSys reported revenue of ₩758b, which is a gain of 12%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, CammSys had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩5.3b 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩20b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for CammSys (of which 1 makes us a bit uncomfortable!) you should know about.

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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