KOREA ADVANCED MATERIALS (KOSDAQ:062970) Has Debt But No Earnings; Should You Worry?

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. We note that KOREA ADVANCED MATERIALS Co., Ltd. (KOSDAQ:062970) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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.

What Is KOREA ADVANCED MATERIALS's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 KOREA ADVANCED MATERIALS had debt of ₩13.4b, up from ₩12.6b in one year. However, it does have ₩14.3b in cash offsetting this, leading to net cash of ₩815.9m.

A Look At KOREA ADVANCED MATERIALS' Liabilities

Zooming in on the latest balance sheet data, we can see that KOREA ADVANCED MATERIALS had liabilities of ₩22.9b due within 12 months and liabilities of ₩3.06b due beyond that. Offsetting this, it had ₩14.3b in cash and ₩1.08b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩10.6b.

While this might seem like a lot, it is not so bad since KOREA ADVANCED MATERIALS has a market capitalization of ₩46.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, KOREA ADVANCED MATERIALS boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since KOREA ADVANCED MATERIALS will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

View our latest analysis for KOREA ADVANCED MATERIALS

Over 12 months, KOREA ADVANCED MATERIALS made a loss at the EBIT level, and saw its revenue drop to ₩6.5b, which is a fall of 55%. That makes us nervous, to say the least.

So How Risky Is KOREA ADVANCED MATERIALS?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that KOREA ADVANCED MATERIALS 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 ₩2.9b and booked a ₩14b accounting loss. But the saving grace is the ₩815.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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, we've discovered 4 warning signs for KOREA ADVANCED MATERIALS (2 are significant!) that you should be aware of before investing here.

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.