We Think Korea Circuit (KRX:007810) Has A Fair Chunk Of 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 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 Korea Circuit Co., Ltd. (KRX:007810) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Korea Circuit

How Much Debt Does Korea Circuit Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Korea Circuit had ₩272.7b of debt, an increase on ₩217.5b, over one year. However, it also had ₩171.0b in cash, and so its net debt is ₩101.6b.

How Strong Is Korea Circuit's Balance Sheet?

The latest balance sheet data shows that Korea Circuit had liabilities of ₩277.6b due within a year, and liabilities of ₩269.3b falling due after that. On the other hand, it had cash of ₩171.0b and ₩247.8b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩128.1b.

This deficit isn't so bad because Korea Circuit is worth ₩286.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Korea Circuit can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Korea Circuit made a loss at the EBIT level, and saw its revenue drop to ₩1.4t, which is a fall of 4.5%. That's not what we would hope to see.

Caveat Emptor

Importantly, Korea Circuit had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩24b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩25b. So to be blunt we do think it is risky. For riskier companies like Korea Circuit I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.