Is MAKUS (KOSDAQ:093520) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 MAKUS, Inc. (KOSDAQ:093520) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MAKUS

What Is MAKUS's Net Debt?

As you can see below, at the end of September 2020, MAKUS had ₩4.55b of debt, up from ₩1.55b a year ago. Click the image for more detail. However, it does have ₩30.0b in cash offsetting this, leading to net cash of ₩25.5b.

How Healthy Is MAKUS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MAKUS had liabilities of ₩71.1b due within 12 months and liabilities of ₩1.26b due beyond that. Offsetting these obligations, it had cash of ₩30.0b as well as receivables valued at ₩13.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩28.7b.

MAKUS has a market capitalization of ₩63.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, MAKUS boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, MAKUS grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MAKUS'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. MAKUS may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, MAKUS produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While MAKUS does have more liabilities than liquid assets, it also has net cash of ₩25.5b. And it impressed us with its EBIT growth of 40% over the last year. So we don't think MAKUS's use of debt is risky. 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. Be aware that MAKUS is showing 2 warning signs in our investment analysis , you should know about...

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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