We Think NOVATECH (KOSDAQ:285490) Can Manage Its Debt With Ease

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.' 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 NOVATECH Co., Ltd. (KOSDAQ:285490) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for NOVATECH

What Is NOVATECH's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 NOVATECH had debt of ₩2.33b, up from none in one year. However, it does have ₩45.9b in cash offsetting this, leading to net cash of ₩43.6b.

A Look At NOVATECH's Liabilities

Zooming in on the latest balance sheet data, we can see that NOVATECH had liabilities of ₩14.3b due within 12 months and liabilities of ₩4.84b due beyond that. Offsetting these obligations, it had cash of ₩45.9b as well as receivables valued at ₩12.5b due within 12 months. So it actually has ₩39.2b more liquid assets than total liabilities.

This short term liquidity is a sign that NOVATECH could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NOVATECH has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, NOVATECH grew its EBIT by 316% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NOVATECH will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. NOVATECH 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 most recent three years, NOVATECH recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case NOVATECH has ₩43.6b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 316% over the last year. So we don't think NOVATECH's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with NOVATECH , 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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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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