Health Check: How Prudently Does AeroSpace Technology of Korea (KOSDAQ:067390) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 AeroSpace Technology of Korea Inc. (KOSDAQ:067390) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AeroSpace Technology of Korea

What Is AeroSpace Technology of Korea's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 AeroSpace Technology of Korea had ₩282.8b of debt, an increase on ₩271.3b, over one year. On the flip side, it has ₩8.67b in cash leading to net debt of about ₩274.2b.

A Look At AeroSpace Technology of Korea's Liabilities

Zooming in on the latest balance sheet data, we can see that AeroSpace Technology of Korea had liabilities of ₩175.5b due within 12 months and liabilities of ₩180.6b due beyond that. On the other hand, it had cash of ₩8.67b and ₩17.6b worth of receivables due within a year. So it has liabilities totalling ₩329.8b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩153.5b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, AeroSpace Technology of Korea would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is AeroSpace Technology of Korea's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year AeroSpace Technology of Korea had a loss before interest and tax, and actually shrunk its revenue by 43%, to ₩76b. That makes us nervous, to say the least.

Caveat Emptor

While AeroSpace Technology of Korea's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩18b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₩26b over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for AeroSpace Technology of Korea that you should be aware of.

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. 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.
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