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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Automobile & PCB Inc. (KRX:015260) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View 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 ₩61.5b in debt in September 2020; about the same as the year before. On the flip side, it has ₩5.59b in cash leading to net debt of about ₩55.9b.

How Strong Is Automobile & PCB's Balance Sheet?

We can see from the most recent balance sheet that Automobile & PCB had liabilities of ₩45.1b falling due within a year, and liabilities of ₩34.5b due beyond that. Offsetting these obligations, it had cash of ₩5.59b as well as receivables valued at ₩11.4b due within 12 months. So it has liabilities totalling ₩62.6b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩23.1b 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. After all, Automobile & PCB would likely require a major re-capitalisation if it had to pay its creditors today. 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 Automobile & PCB 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 Automobile & PCB had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₩93b. 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 ₩13b 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. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost ₩9.2b in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Automobile & PCB (of which 1 is a bit concerning!) you should know about.

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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