Oriental Precision & EngineeringLtd (KOSDAQ:014940) Could Easily Take On More 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. As with many other companies Oriental Precision & Engineering Co.,Ltd. (KOSDAQ:014940) makes use of debt. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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.

How Much Debt Does Oriental Precision & EngineeringLtd Carry?

The image below, which you can click on for greater detail, shows that Oriental Precision & EngineeringLtd had debt of ₩44.0b at the end of March 2025, a reduction from ₩52.5b over a year. However, it does have ₩47.2b in cash offsetting this, leading to net cash of ₩3.24b.

A Look At Oriental Precision & EngineeringLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Oriental Precision & EngineeringLtd had liabilities of ₩83.2b due within 12 months and liabilities of ₩26.5b due beyond that. Offsetting these obligations, it had cash of ₩47.2b as well as receivables valued at ₩728.8m due within 12 months. So it has liabilities totalling ₩61.7b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Oriental Precision & EngineeringLtd is worth ₩303.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Oriental Precision & EngineeringLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Oriental Precision & EngineeringLtd

On top of that, Oriental Precision & EngineeringLtd grew its EBIT by 100% over the last twelve months, and that growth will make it easier to handle its debt. 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 Oriental Precision & EngineeringLtd 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Oriental Precision & EngineeringLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Oriental Precision & EngineeringLtd recorded free cash flow worth a fulsome 93% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While Oriental Precision & EngineeringLtd does have more liabilities than liquid assets, it also has net cash of ₩3.24b. And it impressed us with free cash flow of ₩24b, being 93% of its EBIT. So we don't think Oriental Precision & EngineeringLtd's use of debt is risky. 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. Be aware that Oriental Precision & EngineeringLtd is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.