Here's Why Nuvotec (KOSDAQ:060260) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Nuvotec Co. Ltd. (KOSDAQ:060260) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Nuvotec

What Is Nuvotec's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Nuvotec had ₩14.4b of debt, an increase on ₩7.29b, over one year. However, because it has a cash reserve of ₩11.3b, its net debt is less, at about ₩3.05b.

How Strong Is Nuvotec's Balance Sheet?

We can see from the most recent balance sheet that Nuvotec had liabilities of ₩18.1b falling due within a year, and liabilities of ₩14.2b due beyond that. Offsetting these obligations, it had cash of ₩11.3b as well as receivables valued at ₩8.85b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩12.1b.

This deficit isn't so bad because Nuvotec is worth ₩47.4b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nuvotec 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 Nuvotec's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Nuvotec produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩3.9b at the EBIT level. 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. However, it doesn't help that it burned through ₩6.7b of cash over the last year. So in short it's a really 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 Nuvotec that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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