Is PAKERS.Co.Ltd (KOSDAQ:065690) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that PAKERS.Co.,Ltd. (KOSDAQ:065690) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for PAKERS.Co.Ltd

What Is PAKERS.Co.Ltd's Net Debt?

The image below, which you can click on for greater detail, shows that PAKERS.Co.Ltd had debt of ₩5.25b at the end of September 2020, a reduction from ₩7.42b over a year. However, its balance sheet shows it holds ₩25.4b in cash, so it actually has ₩20.2b net cash.

A Look At PAKERS.Co.Ltd's Liabilities

According to the last reported balance sheet, PAKERS.Co.Ltd had liabilities of ₩21.0b due within 12 months, and liabilities of ₩10.4b due beyond 12 months. Offsetting these obligations, it had cash of ₩25.4b as well as receivables valued at ₩26.2b due within 12 months. So it can boast ₩20.2b more liquid assets than total liabilities.

This luscious liquidity implies that PAKERS.Co.Ltd's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, PAKERS.Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is PAKERS.Co.Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year PAKERS.Co.Ltd had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₩85b. That's not what we would hope to see.

So How Risky Is PAKERS.Co.Ltd?

While PAKERS.Co.Ltd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩481m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The next few years will be important as the business matures. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with PAKERS.Co.Ltd (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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