Is PosbankLtd (KOSDAQ:105760) 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 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 note that Posbank Co.,Ltd. (KOSDAQ:105760) 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 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. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for PosbankLtd

What Is PosbankLtd's Debt?

The image below, which you can click on for greater detail, shows that PosbankLtd had debt of ₩6.90b at the end of September 2024, a reduction from ₩16.5b over a year. But on the other hand it also has ₩35.9b in cash, leading to a ₩29.0b net cash position.

A Look At PosbankLtd's Liabilities

According to the last reported balance sheet, PosbankLtd had liabilities of ₩12.2b due within 12 months, and liabilities of ₩1.75b due beyond 12 months. Offsetting these obligations, it had cash of ₩35.9b as well as receivables valued at ₩4.73b due within 12 months. So it actually has ₩26.7b more liquid assets than total liabilities.

This excess liquidity is a great indication that PosbankLtd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that PosbankLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since PosbankLtd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, PosbankLtd made a loss at the EBIT level, and saw its revenue drop to ₩67b, which is a fall of 18%. That's not what we would hope to see.

So How Risky Is PosbankLtd?

Although PosbankLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩985m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Be aware that PosbankLtd is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.