Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that AztechWB Co., Ltd. (KOSDAQ:032080) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for AztechWB
What Is AztechWB's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 AztechWB had ₩24.4b of debt, an increase on ₩16.9b, over one year. However, it does have ₩17.8b in cash offsetting this, leading to net debt of about ₩6.53b.
How Healthy Is AztechWB's Balance Sheet?
The latest balance sheet data shows that AztechWB had liabilities of ₩22.7b due within a year, and liabilities of ₩4.78b falling due after that. Offsetting these obligations, it had cash of ₩17.8b as well as receivables valued at ₩7.55b due within 12 months. So its liabilities total ₩2.13b more than the combination of its cash and short-term receivables.
Given AztechWB has a market capitalization of ₩52.5b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is AztechWB's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, AztechWB made a loss at the EBIT level, and saw its revenue drop to ₩35b, which is a fall of 25%. That makes us nervous, to say the least.
Caveat Emptor
While AztechWB's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩803m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩3.5b of cash over the last year. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for AztechWB that you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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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About KOSDAQ:A032080
Excellent balance sheet and fair value.
