T-Robotics.Co.Ltd (KOSDAQ:117730) Has A Somewhat Strained Balance Sheet

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.' 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. Importantly, T-Robotics.Co.,Ltd. (KOSDAQ:117730) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for T-Robotics.Co.Ltd

How Much Debt Does T-Robotics.Co.Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 T-Robotics.Co.Ltd had ₩32.2b of debt, an increase on ₩21.2b, over one year. On the flip side, it has ₩19.4b in cash leading to net debt of about ₩12.9b.

How Healthy Is T-Robotics.Co.Ltd's Balance Sheet?

According to the last reported balance sheet, T-Robotics.Co.Ltd had liabilities of ₩39.6b due within 12 months, and liabilities of ₩11.1b due beyond 12 months. On the other hand, it had cash of ₩19.4b and ₩9.03b worth of receivables due within a year. So its liabilities total ₩22.3b more than the combination of its cash and short-term receivables.

T-Robotics.Co.Ltd has a market capitalization of ₩104.7b, so it could very likely raise cash to ameliorate 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

T-Robotics.Co.Ltd has net debt worth 1.9 times EBITDA, which isn't too much, but its interest cover looks a bit on the low side, with EBIT at only 2.7 times the interest expense. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. Notably, T-Robotics.Co.Ltd made a loss at the EBIT level, last year, but improved that to positive EBIT of ₩3.0b in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since T-Robotics.Co.Ltd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, T-Robotics.Co.Ltd 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.

Our View

We'd go so far as to say T-Robotics.Co.Ltd's conversion of EBIT to free cash flow was disappointing. But at least its level of total liabilities is not so bad. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making T-Robotics.Co.Ltd stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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 example, we've discovered 4 warning signs for T-Robotics.Co.Ltd (1 can't be ignored!) 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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