Is AeroSpace Technology of Korea (KOSDAQ:067390) A Risky Investment?

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 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. We note that AeroSpace Technology of Korea Inc. (KOSDAQ:067390) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AeroSpace Technology of Korea

What Is AeroSpace Technology of Korea's Net Debt?

The image below, which you can click on for greater detail, shows that AeroSpace Technology of Korea had debt of ₩178.3b at the end of September 2024, a reduction from ₩339.5b over a year. However, because it has a cash reserve of ₩24.3b, its net debt is less, at about ₩154.0b.

A Look At AeroSpace Technology of Korea's Liabilities

The latest balance sheet data shows that AeroSpace Technology of Korea had liabilities of ₩71.1b due within a year, and liabilities of ₩198.5b falling due after that. On the other hand, it had cash of ₩24.3b and ₩33.7b worth of receivables due within a year. So its liabilities total ₩211.6b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩215.7b, so it does suggest shareholders should keep an eye on AeroSpace Technology of Korea's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 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 AeroSpace Technology of Korea had a loss before interest and tax, and actually shrunk its revenue by 6.2%, to ₩160b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months AeroSpace Technology of Korea produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩426m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩95b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for AeroSpace Technology of Korea that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.