Is Vitzrosys (KOSDAQ:054220) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Vitzrosys. Co., Ltd (KOSDAQ:054220) does carry debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Vitzrosys's Debt?

As you can see below, at the end of December 2024, Vitzrosys had ₩14.2b of debt, up from ₩9.05b a year ago. Click the image for more detail. On the flip side, it has ₩2.87b in cash leading to net debt of about ₩11.3b.

How Strong Is Vitzrosys' Balance Sheet?

We can see from the most recent balance sheet that Vitzrosys had liabilities of ₩29.2b falling due within a year, and liabilities of ₩4.51b due beyond that. On the other hand, it had cash of ₩2.87b and ₩7.55b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩23.3b.

When you consider that this deficiency exceeds the company's ₩21.2b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Vitzrosys'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.

Check out our latest analysis for Vitzrosys

In the last year Vitzrosys wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to ₩26b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Vitzrosys managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping ₩6.4b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₩3.2b 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. However, not all investment risk resides within the balance sheet - far from it. For example Vitzrosys has 4 warning signs (and 2 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.