Is OmnisystemLtd (KOSDAQ:057540) 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. As with many other companies Omnisystem Co.,Ltd. (KOSDAQ:057540) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for OmnisystemLtd

What Is OmnisystemLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that OmnisystemLtd had ₩14.9b of debt in September 2020, down from ₩20.3b, one year before. However, its balance sheet shows it holds ₩30.0b in cash, so it actually has ₩15.1b net cash.

How Strong Is OmnisystemLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that OmnisystemLtd had liabilities of ₩21.2b due within 12 months and liabilities of ₩4.85b due beyond that. Offsetting this, it had ₩30.0b in cash and ₩11.2b in receivables that were due within 12 months. So it can boast ₩15.1b more liquid assets than total liabilities.

This short term liquidity is a sign that OmnisystemLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, OmnisystemLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since OmnisystemLtd will need earnings to service that debt. 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, OmnisystemLtd made a loss at the EBIT level, and saw its revenue drop to ₩92b, which is a fall of 5.6%. We would much prefer see growth.

So How Risky Is OmnisystemLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that OmnisystemLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩11b and booked a ₩10b accounting loss. Given it only has net cash of ₩15.1b, the company may need to raise more capital if it doesn't reach break-even soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - OmnisystemLtd has 2 warning signs we think 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. 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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