Does Ilji Technology (KOSDAQ:019540) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ilji Technology Co., Ltd. (KOSDAQ:019540) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ilji Technology

How Much Debt Does Ilji Technology Carry?

The image below, which you can click on for greater detail, shows that Ilji Technology had debt of ₩114.5b at the end of September 2020, a reduction from ₩128.6b over a year. However, it does have ₩13.5b in cash offsetting this, leading to net debt of about ₩100.9b.

How Healthy Is Ilji Technology's Balance Sheet?

The latest balance sheet data shows that Ilji Technology had liabilities of ₩230.6b due within a year, and liabilities of ₩16.2b falling due after that. Offsetting these obligations, it had cash of ₩13.5b as well as receivables valued at ₩35.6b due within 12 months. So its liabilities total ₩197.7b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₩55.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Ilji Technology would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ilji Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Ilji Technology had a loss before interest and tax, and actually shrunk its revenue by 15%, to ₩168b. We would much prefer see growth.

Caveat Emptor

Not only did Ilji Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩12b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₩19b in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. Take risks, for example - Ilji Technology has 5 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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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