Is ISU Petasys (KRX:007660) Using Too Much Debt?

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 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, ISU Petasys Co., Ltd. (KRX:007660) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 ISU Petasys

What Is ISU Petasys's Debt?

The chart below, which you can click on for greater detail, shows that ISU Petasys had ₩253.7b in debt in September 2020; about the same as the year before. However, because it has a cash reserve of ₩38.0b, its net debt is less, at about ₩215.7b.

How Strong Is ISU Petasys' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ISU Petasys had liabilities of ₩316.4b due within 12 months and liabilities of ₩46.8b due beyond that. On the other hand, it had cash of ₩38.0b and ₩122.2b worth of receivables due within a year. So it has liabilities totalling ₩203.0b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₩143.0b, we think shareholders really should watch ISU Petasys's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine ISU Petasys'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.

In the last year ISU Petasys had a loss before interest and tax, and actually shrunk its revenue by 9.1%, to ₩505b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months ISU Petasys produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩15b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩49b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for ISU Petasys you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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