The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, builds no bones about it when he declares ‘The largegest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we consider about how risky a company is, we always like to see at its apply of debt, since debt overload can lead to ruin. We can see that Chunbo Co., Ltd. (KOSDAQ:278280) does apply debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to assist businesses grow, but if a business is incapable of paying off its lconcludeers, 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 becaapply lconcludeers force them to raise capital at a distressed price. Having declared that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business applys is to see at its cash and debt toobtainher.
What Is Chunbo’s Debt?
As you can see below, Chunbo had ₩301.6b of debt at September 2025, down from ₩560.5b a year prior. However, it does have ₩49.4b in cash offsetting this, leading to net debt of about ₩252.2b.
How Healthy Is Chunbo’s Balance Sheet?
According to the last reported balance sheet, Chunbo had liabilities of ₩355.3b due within 12 months, and liabilities of ₩71.7b due beyond 12 months. On the other hand, it had cash of ₩49.4b and ₩25.3b worth of receivables due within a year. So its liabilities total ₩352.2b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Chunbo has a market capitalization of ₩610.1b, and so it could probably strengthen its balance sheet by raising capital if it requireded to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
View our latest analysis for Chunbo
We measure a company’s debt load relative to its earnings power by seeing at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Weak interest cover of 0.46 times and a disturbingly high net debt to EBITDA ratio of 8.6 hit our confidence in Chunbo like a one-two punch to the gut. This means we’d consider it to have a heavy debt load. However, the silver lining was that Chunbo achieved a positive EBIT of ₩8.8b in the last twelve months, an improvement on the prior year’s loss. 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 Chunbo’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals consider, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Chunbo burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its apply of debt is more risky.
Our View
To be frank both Chunbo’s interest cover and its track record of converting EBIT to free cash flow build us rather uncomfortable with its debt levels. Having declared that, its ability to grow its EBIT isn’t such a worry. Overall, it seems to us that Chunbo’s balance sheet is really quite a risk to the business. For this reason we’re pretty cautious about the stock, and we consider shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 4 warning signs for Chunbo (2 build us uncomfortable!) that you should be aware of before investing here.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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 applying an unbiased methodology and our articles are not intconcludeed to be financial advice. It does not constitute a recommconcludeation to purchase or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focapplyd 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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