Is INNO Instrument (KOSDAQ:215790) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, INNO Instrument Inc. (KOSDAQ:215790) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for INNO Instrument

What Is INNO Instrument's Debt?

You can click the graphic below for the historical numbers, but it shows that INNO Instrument had ₩22.4b of debt in September 2020, down from ₩48.7b, one year before. On the flip side, it has ₩18.2b in cash leading to net debt of about ₩4.25b.

A Look At INNO Instrument's Liabilities

According to the last reported balance sheet, INNO Instrument had liabilities of ₩35.2b due within 12 months, and liabilities of ₩1.93b due beyond 12 months. On the other hand, it had cash of ₩18.2b and ₩20.3b worth of receivables due within a year. So it can boast ₩1.41b more liquid assets than total liabilities.

This state of affairs indicates that INNO Instrument's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩90.4b company is short on cash, but still worth keeping an eye on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine INNO Instrument's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, INNO Instrument made a loss at the EBIT level, and saw its revenue drop to ₩38b, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

Not only did INNO Instrument's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩7.7b at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. 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. To that end, you should learn about the 4 warning signs we've spotted with INNO Instrument (including 2 which is are concerning) .

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. 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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