Is Mercury (KOSDAQ:100590) Using Too Much Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Mercury Corporation (KOSDAQ:100590) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

Check out our latest analysis for Mercury

How Much Debt Does Mercury Carry?

The image below, which you can click on for greater detail, shows that Mercury had debt of ₩11.9b at the end of September 2024, a reduction from ₩26.4b over a year. But it also has ₩21.2b in cash to offset that, meaning it has ₩9.32b net cash.

How Healthy Is Mercury's Balance Sheet?

We can see from the most recent balance sheet that Mercury had liabilities of ₩21.4b falling due within a year, and liabilities of ₩4.96b due beyond that. On the other hand, it had cash of ₩21.2b and ₩14.2b worth of receivables due within a year. So it actually has ₩9.06b more liquid assets than total liabilities.

This short term liquidity is a sign that Mercury could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Mercury boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Mercury's EBIT fell a jaw-dropping 81% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Mercury 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Mercury 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. Over the last two years, Mercury actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Mercury has ₩9.32b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩3.5b, being 493% of its EBIT. So we are not troubled with Mercury's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Mercury (1 is a bit concerning) you should be aware of.

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. 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.