Would KOREA ADVANCED MATERIALS (KOSDAQ:062970) Be Better Off With Less Debt?

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.' 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, KOREA ADVANCED MATERIALS Co., Ltd. (KOSDAQ:062970) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for KOREA ADVANCED MATERIALS

What Is KOREA ADVANCED MATERIALS's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 KOREA ADVANCED MATERIALS had debt of ₩13.6b, up from ₩12.8b in one year. However, it also had ₩3.58b in cash, and so its net debt is ₩10.0b.

How Healthy Is KOREA ADVANCED MATERIALS' Balance Sheet?

We can see from the most recent balance sheet that KOREA ADVANCED MATERIALS had liabilities of ₩16.9b falling due within a year, and liabilities of ₩3.20b due beyond that. Offsetting this, it had ₩3.58b in cash and ₩2.33b in receivables that were due within 12 months. So it has liabilities totalling ₩14.2b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩20.7b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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.

Over 12 months, KOREA ADVANCED MATERIALS made a loss at the EBIT level, and saw its revenue drop to ₩8.4b, which is a fall of 48%. To be frank that doesn't bode well.

Caveat Emptor

While KOREA ADVANCED MATERIALS's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩4.4b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩2.3b of cash over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for KOREA ADVANCED MATERIALS (2 are potentially serious) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.