Is isMedia (KOSDAQ:181340) A Risky Investment?

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.' 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 isMedia Co., Ltd. (KOSDAQ:181340) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for isMedia

How Much Debt Does isMedia Carry?

The image below, which you can click on for greater detail, shows that at September 2020 isMedia had debt of ₩19.4b, up from ₩17.3b in one year. But it also has ₩23.7b in cash to offset that, meaning it has ₩4.30b net cash.

A Look At isMedia's Liabilities

Zooming in on the latest balance sheet data, we can see that isMedia had liabilities of ₩26.3b due within 12 months and liabilities of ₩6.39b due beyond that. Offsetting this, it had ₩23.7b in cash and ₩7.50b in receivables that were due within 12 months. So it has liabilities totalling ₩1.51b more than its cash and near-term receivables, combined.

Since publicly traded isMedia shares are worth a total of ₩46.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, isMedia 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 isMedia's earnings that will influence how the balance sheet holds up in the future. 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, isMedia made a loss at the EBIT level, and saw its revenue drop to ₩26b, which is a fall of 70%. To be frank that doesn't bode well.

So How Risky Is isMedia?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year isMedia had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩404m of cash and made a loss of ₩17b. Given it only has net cash of ₩4.30b, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Be aware that isMedia is showing 4 warning signs in our investment analysis , and 2 of those are a bit unpleasant...

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. 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.
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