Is PAKERS.Co.Ltd (KOSDAQ:065690) Using Too Much Debt?

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.' 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for PAKERS.Co.Ltd

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

As you can see below, PAKERS.Co.Ltd had ₩5.25b of debt at December 2020, down from ₩7.65b a year prior. But on the other hand it also has ₩24.5b in cash, leading to a ₩19.2b net cash position.

How Healthy Is PAKERS.Co.Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PAKERS.Co.Ltd had liabilities of ₩25.3b due within 12 months and liabilities of ₩8.65b due beyond that. Offsetting this, it had ₩24.5b in cash and ₩24.6b in receivables that were due within 12 months. So it can boast ₩15.1b more liquid assets than total liabilities.

This excess liquidity is a great indication that PAKERS.Co.Ltd's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, PAKERS.Co.Ltd 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 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 22%, to ₩78b. To be frank that doesn't bode well.

So How Risky Is PAKERS.Co.Ltd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that PAKERS.Co.Ltd 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 ₩8.3b and booked a ₩8.3b accounting loss. Given it only has net cash of ₩19.2b, the company may need to raise more capital if it doesn't reach break-even soon. 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. 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 example, we've discovered 3 warning signs for PAKERS.Co.Ltd (1 doesn't sit too well with us!) that you should be aware of before investing here.

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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