Automobile & PCB (KRX:015260) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies Automobile & PCB Inc. (KRX:015260) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Having said 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 uses is to look at its cash and debt together.

Check out our latest analysis for Automobile & PCB

What Is Automobile & PCB's Net Debt?

The chart below, which you can click on for greater detail, shows that Automobile & PCB had ₩39.8b in debt in June 2024; about the same as the year before. However, it does have ₩11.1b in cash offsetting this, leading to net debt of about ₩28.8b.

A Look At Automobile & PCB's Liabilities

The latest balance sheet data shows that Automobile & PCB had liabilities of ₩61.1b due within a year, and liabilities of ₩5.99b falling due after that. Offsetting these obligations, it had cash of ₩11.1b as well as receivables valued at ₩13.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩42.2b.

Given this deficit is actually higher than the company's market capitalization of ₩35.9b, we think shareholders really should watch Automobile & PCB's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Automobile & PCB will need earnings to service that debt. 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 Automobile & PCB had a loss before interest and tax, and actually shrunk its revenue by 15%, to ₩123b. That's not what we would hope to see.

Caveat Emptor

Not only did Automobile & PCB'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 ₩4.8b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₩6.1b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Automobile & PCB (1 doesn't sit too well with us) you should be aware of.

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.