Is Automobile & PCB (KRX:015260) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Automobile & PCB

What Is Automobile & PCB's Net Debt?

The image below, which you can click on for greater detail, shows that Automobile & PCB had debt of ₩37.6b at the end of March 2024, a reduction from ₩43.5b over a year. However, it also had ₩9.03b in cash, and so its net debt is ₩28.5b.

A Look At Automobile & PCB's Liabilities

According to the last reported balance sheet, Automobile & PCB had liabilities of ₩59.4b due within 12 months, and liabilities of ₩6.30b due beyond 12 months. Offsetting this, it had ₩9.03b in cash and ₩14.4b in receivables that were due within 12 months. So it has liabilities totalling ₩42.3b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₩40.6b, we think shareholders really should watch Automobile & PCB's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 4.3%, to ₩132b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Automobile & PCB produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩3.5b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₩11b. And until that time we think this is a risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Automobile & PCB you should be aware of, and 1 of them is concerning.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com