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 Xperix Inc. (KOSDAQ:317770) makes use of debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Xperix
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Xperix had ₩17.7b of debt, an increase on ₩1.00m, over one year. However, its balance sheet shows it holds ₩20.5b in cash, so it actually has ₩2.74b net cash.
Zooming in on the latest balance sheet data, we can see that Xperix had liabilities of ₩49.3b due within 12 months and liabilities of ₩686.9m due beyond that. On the other hand, it had cash of ₩20.5b and ₩1.83b worth of receivables due within a year. So its liabilities total ₩27.6b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Xperix is worth ₩73.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Xperix also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Xperix's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Xperix made a loss at the EBIT level, and saw its revenue drop to ₩11b, which is a fall of 22%. To be frank that doesn't bode well.
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Xperix had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩2.0b of cash and made a loss of ₩6.7b. Given it only has net cash of ₩2.74b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Xperix (1 doesn't sit too well with us!) that you should be aware of before investing here.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.