Would Vitzrosys (KOSDAQ:054220) Be Better Off With Less Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Vitzrosys. Co., Ltd (KOSDAQ:054220) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Vitzrosys

What Is Vitzrosys's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Vitzrosys had ₩12.9b of debt, an increase on ₩9.05b, over one year. On the flip side, it has ₩3.49b in cash leading to net debt of about ₩9.38b.

A Look At Vitzrosys' Liabilities

We can see from the most recent balance sheet that Vitzrosys had liabilities of ₩23.9b falling due within a year, and liabilities of ₩3.90b due beyond that. Offsetting this, it had ₩3.49b in cash and ₩4.55b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩19.7b.

This deficit is considerable relative to its market capitalization of ₩25.4b, so it does suggest shareholders should keep an eye on Vitzrosys' 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 it is Vitzrosys'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 Vitzrosys wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to ₩24b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Vitzrosys produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩6.8b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩2.0b 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Vitzrosys (1 is significant) you should be aware of.

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.

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