OmnisystemLtd (KOSDAQ:057540) Could Easily Take On More 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.' 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, Omnisystem Co.,Ltd. (KOSDAQ:057540) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for OmnisystemLtd

How Much Debt Does OmnisystemLtd Carry?

As you can see below, OmnisystemLtd had ₩4.61b of debt at June 2024, down from ₩6.13b a year prior. However, its balance sheet shows it holds ₩14.1b in cash, so it actually has ₩9.46b 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 ₩22.2b due within 12 months and liabilities of ₩1.72b due beyond that. Offsetting these obligations, it had cash of ₩14.1b as well as receivables valued at ₩14.4b due within 12 months. So it can boast ₩4.54b 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!

Even more impressive was the fact that OmnisystemLtd grew its EBIT by 104% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While OmnisystemLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, OmnisystemLtd actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that OmnisystemLtd has net cash of ₩9.46b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -₩3.8b, being 157% of its EBIT. So is OmnisystemLtd's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for OmnisystemLtd (of which 1 is a bit concerning!) 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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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.