Is Agabang&Company (KOSDAQ:013990) Using Debt Sensibly?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Agabang&Company (KOSDAQ:013990) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Agabang&Company

What Is Agabang&Company's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Agabang&Company had ₩6.19b of debt, an increase on ₩3.17b, over one year. However, its balance sheet shows it holds ₩15.1b in cash, so it actually has ₩8.90b net cash.

A Look At Agabang&Company's Liabilities

We can see from the most recent balance sheet that Agabang&Company had liabilities of ₩37.0b falling due within a year, and liabilities of ₩16.5b due beyond that. Offsetting this, it had ₩15.1b in cash and ₩19.9b in receivables that were due within 12 months. So it has liabilities totalling ₩18.5b more than its cash and near-term receivables, combined.

Of course, Agabang&Company has a market capitalization of ₩120.4b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Agabang&Company boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Agabang&Company 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.

In the last year Agabang&Company had a loss before interest and tax, and actually shrunk its revenue by 8.8%, to ₩122b. That's not what we would hope to see.

So How Risky Is Agabang&Company?

Although Agabang&Company had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩917m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Agabang&Company that you should be aware of.

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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