Is HomecastLtd (KOSDAQ:064240) Weighed On By Its Debt Load?

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. We can see that Homecast Co.,Ltd. (KOSDAQ:064240) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for HomecastLtd

What Is HomecastLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 HomecastLtd had debt of ₩20.9b, up from ₩9.82b in one year. But it also has ₩31.6b in cash to offset that, meaning it has ₩10.6b net cash.

How Healthy Is HomecastLtd's Balance Sheet?

According to the last reported balance sheet, HomecastLtd had liabilities of ₩30.8b due within 12 months, and liabilities of ₩1.70b due beyond 12 months. Offsetting these obligations, it had cash of ₩31.6b as well as receivables valued at ₩7.08b due within 12 months. So it actually has ₩6.16b more liquid assets than total liabilities.

This short term liquidity is a sign that HomecastLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that HomecastLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HomecastLtd 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.

Over 12 months, HomecastLtd reported revenue of ₩74b, which is a gain of 18%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is HomecastLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months HomecastLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩16b and booked a ₩7.4b accounting loss. However, it has net cash of ₩10.6b, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - HomecastLtd has 1 warning sign we think you should be aware of.

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.