Namuga (KOSDAQ:190510) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Namuga Co., Ltd. (KOSDAQ:190510) makes use of debt. But should shareholders be worried about its use of debt?

We check all companies for important risks. See what we found for Namuga in our free report.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Namuga's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Namuga had ₩24.7b of debt, an increase on ₩22.9b, over one year. However, it does have ₩135.1b in cash offsetting this, leading to net cash of ₩110.4b.

A Look At Namuga's Liabilities

The latest balance sheet data shows that Namuga had liabilities of ₩92.0b due within a year, and liabilities of ₩5.49b falling due after that. On the other hand, it had cash of ₩135.1b and ₩31.7b worth of receivables due within a year. So it can boast ₩69.3b more liquid assets than total liabilities.

This surplus strongly suggests that Namuga has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Namuga boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Namuga

But the other side of the story is that Namuga saw its EBIT decline by 7.8% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Namuga 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. While Namuga has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Namuga 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 we empathize with investors who find debt concerning, you should keep in mind that Namuga has net cash of ₩110.4b, as well as more liquid assets than liabilities. The cherry on top was that in converted 204% of that EBIT to free cash flow, bringing in ₩57b. So we don't think Namuga's use of debt is risky. Given Namuga has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.