NextEye (KOSDAQ:137940) Has Debt But No Earnings; Should You Worry?

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 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 NextEye Co., Ltd. (KOSDAQ:137940) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for NextEye

What Is NextEye's Debt?

As you can see below, at the end of March 2024, NextEye had ₩22.2b of debt, up from ₩17.3b a year ago. Click the image for more detail. But on the other hand it also has ₩48.7b in cash, leading to a ₩26.5b net cash position.

How Healthy Is NextEye's Balance Sheet?

We can see from the most recent balance sheet that NextEye had liabilities of ₩25.6b falling due within a year, and liabilities of ₩1.19b due beyond that. On the other hand, it had cash of ₩48.7b and ₩1.79b worth of receivables due within a year. So it can boast ₩23.7b more liquid assets than total liabilities.

This surplus strongly suggests that NextEye has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, NextEye 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 NextEye'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.

Over 12 months, NextEye made a loss at the EBIT level, and saw its revenue drop to ₩22b, which is a fall of 22%. To be frank that doesn't bode well.

So How Risky Is NextEye?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year NextEye had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩4.1b of cash and made a loss of ₩17b. But the saving grace is the ₩26.5b on the balance sheet. That means it could keep spending at its current rate for more than two years. 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 2 warning signs for NextEye (1 is significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com