Is RS AutomationLtd (KOSDAQ:140670) Using Too Much Debt?

Warren Buffett famously said, '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. We note that RS Automation Co.,Ltd. (KOSDAQ:140670) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for RS AutomationLtd

What Is RS AutomationLtd's Net Debt?

As you can see below, RS AutomationLtd had ₩21.9b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩13.4b in cash, and so its net debt is ₩8.51b.

How Healthy Is RS AutomationLtd's Balance Sheet?

We can see from the most recent balance sheet that RS AutomationLtd had liabilities of ₩34.9b falling due within a year, and liabilities of ₩3.73b due beyond that. Offsetting these obligations, it had cash of ₩13.4b as well as receivables valued at ₩14.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩10.8b.

Given RS AutomationLtd has a market capitalization of ₩143.9b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is RS AutomationLtd'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.

Over 12 months, RS AutomationLtd made a loss at the EBIT level, and saw its revenue drop to ₩71b, which is a fall of 33%. To be frank that doesn't bode well.

Caveat Emptor

While RS AutomationLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩5.2b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩8.0b. So to be blunt we do think it is 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 - RS AutomationLtd has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com