Is STCube (KOSDAQ:052020) A Risky Investment?

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.' 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. We can see that STCube, Inc. (KOSDAQ:052020) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for STCube

What Is STCube's Net Debt?

As you can see below, STCube had ₩3.73b of debt at December 2020, down from ₩13.1b a year prior. However, its balance sheet shows it holds ₩43.2b in cash, so it actually has ₩39.5b net cash.

How Strong Is STCube's Balance Sheet?

The latest balance sheet data shows that STCube had liabilities of ₩6.01b due within a year, and liabilities of ₩8.41b falling due after that. Offsetting these obligations, it had cash of ₩43.2b as well as receivables valued at ₩1.55b due within 12 months. So it actually has ₩30.4b more liquid assets than total liabilities.

This short term liquidity is a sign that STCube could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that STCube has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is STCube's earnings that will influence how the balance sheet holds up in the future. 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, STCube made a loss at the EBIT level, and saw its revenue drop to ₩10b, which is a fall of 42%. To be frank that doesn't bode well.

So How Risky Is STCube?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months STCube lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩10b of cash and made a loss of ₩16b. While this does make the company a bit risky, it's important to remember it has net cash of ₩39.5b. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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, we've discovered 1 warning sign for STCube that you should be aware of before investing here.

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.

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This article by Simply Wall St is general in nature. 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.
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