Is KOREA ADVANCED MATERIALS (KOSDAQ:062970) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies KOREA ADVANCED MATERIALS Co., Ltd. (KOSDAQ:062970) makes use of debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does KOREA ADVANCED MATERIALS Carry?

As you can see below, KOREA ADVANCED MATERIALS had ₩8.40b of debt at March 2025, down from ₩13.3b a year prior. However, it does have ₩8.44b in cash offsetting this, leading to net cash of ₩41.7m.

How Strong Is KOREA ADVANCED MATERIALS' Balance Sheet?

According to the last reported balance sheet, KOREA ADVANCED MATERIALS had liabilities of ₩8.33b due within 12 months, and liabilities of ₩1.70b due beyond 12 months. Offsetting this, it had ₩8.44b in cash and ₩860.6m in receivables that were due within 12 months. So its liabilities total ₩733.5m more than the combination of its cash and short-term receivables.

Having regard to KOREA ADVANCED MATERIALS' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩64.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, KOREA ADVANCED MATERIALS 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 KOREA ADVANCED MATERIALS 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.

See our latest analysis for KOREA ADVANCED MATERIALS

In the last year KOREA ADVANCED MATERIALS had a loss before interest and tax, and actually shrunk its revenue by 53%, to ₩6.1b. To be frank that doesn't bode well.

So How Risky Is KOREA ADVANCED MATERIALS?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that KOREA ADVANCED MATERIALS had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩3.3b of cash and made a loss of ₩21b. But at least it has ₩41.7m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that KOREA ADVANCED MATERIALS is showing 4 warning signs in our investment analysis , and 2 of those are potentially serious...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.