Is Wave Electronics (KOSDAQ:095270) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Wave Electronics Co., Ltd. (KOSDAQ:095270) makes use of debt. But the real question is whether this debt is making the company risky.

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Wave Electronics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Wave Electronics had ₩3.93b of debt, an increase on ₩2.42b, over one year. However, it does have ₩19.5b in cash offsetting this, leading to net cash of ₩15.5b.

How Healthy Is Wave Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Wave Electronics had liabilities of ₩38.3b due within 12 months and liabilities of ₩4.38b due beyond that. On the other hand, it had cash of ₩19.5b and ₩11.2b worth of receivables due within a year. So it has liabilities totalling ₩12.0b more than its cash and near-term receivables, combined.

Of course, Wave Electronics has a market capitalization of ₩60.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Wave Electronics also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Wave Electronics 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.

Check out our latest analysis for Wave Electronics

Over 12 months, Wave Electronics made a loss at the EBIT level, and saw its revenue drop to ₩76b, which is a fall of 10%. We would much prefer see growth.

So How Risky Is Wave Electronics?

Although Wave Electronics had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩9.3b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Wave Electronics .

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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.