Here's Why Austem (KOSDAQ:031510) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Austem Company Ltd. (KOSDAQ:031510) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Austem

How Much Debt Does Austem Carry?

The image below, which you can click on for greater detail, shows that Austem had debt of ₩69.1b at the end of September 2020, a reduction from ₩73.0b over a year. On the flip side, it has ₩43.8b in cash leading to net debt of about ₩25.3b.

How Healthy Is Austem's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Austem had liabilities of ₩89.4b due within 12 months and liabilities of ₩5.01b due beyond that. Offsetting these obligations, it had cash of ₩43.8b as well as receivables valued at ₩25.4b due within 12 months. So its liabilities total ₩25.2b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Austem is worth ₩82.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Austem's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Austem had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₩129b. That's not what we would hope to see.

Caveat Emptor

While Austem's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩2.0b. 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. We would feel better if it turned its trailing twelve month loss of ₩6.5b into a profit. So in short it's a really risky stock. 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. We've identified 4 warning signs with Austem (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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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