Is HomecastLtd (KOSDAQ:064240) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Homecast Co.,Ltd. (KOSDAQ:064240) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for HomecastLtd

How Much Debt Does HomecastLtd Carry?

As you can see below, at the end of September 2020, HomecastLtd had ₩5.00b of debt, up from none a year ago. Click the image for more detail. But it also has ₩16.2b in cash to offset that, meaning it has ₩11.2b net cash.

A Look At HomecastLtd's Liabilities

The latest balance sheet data shows that HomecastLtd had liabilities of ₩13.8b due within a year, and liabilities of ₩465.3m falling due after that. On the other hand, it had cash of ₩16.2b and ₩37.8b worth of receivables due within a year. So it can boast ₩39.7b more liquid assets than total liabilities.

This surplus strongly suggests that HomecastLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, HomecastLtd 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 HomecastLtd 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, HomecastLtd made a loss at the EBIT level, and saw its revenue drop to ₩44b, which is a fall of 20%. We would much prefer see growth.

So How Risky Is HomecastLtd?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year HomecastLtd had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩19b of cash and made a loss of ₩8.8b. With only ₩11.2b on the balance sheet, it would appear that its going to need to raise capital again 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for HomecastLtd you should be aware of, and 2 of them shouldn't be ignored.

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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