RFTech (KOSDAQ:061040) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 RFTech Co., Ltd. (KOSDAQ:061040) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for RFTech

What Is RFTech's Debt?

You can click the graphic below for the historical numbers, but it shows that RFTech had ₩51.8b of debt in September 2020, down from ₩57.0b, one year before. However, its balance sheet shows it holds ₩74.5b in cash, so it actually has ₩22.7b net cash.

How Strong Is RFTech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that RFTech had liabilities of ₩134.2b due within 12 months and liabilities of ₩5.20b due beyond that. On the other hand, it had cash of ₩74.5b and ₩49.3b worth of receivables due within a year. So it has liabilities totalling ₩15.6b more than its cash and near-term receivables, combined.

Of course, RFTech has a market capitalization of ₩265.5b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, RFTech boasts net cash, so it's fair to say it does not have a heavy debt load!

We saw RFTech grow its EBIT by 6.4% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine RFTech's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. RFTech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, RFTech saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about RFTech's liabilities, but we can be reassured by the fact it has has net cash of ₩22.7b. And it also grew its EBIT by 6.4% over the last year. So although we see some areas for improvement, we're not too worried about RFTech's balance sheet. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with RFTech (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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