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. We note that Alton Sports Co.,Ltd. (KOSDAQ:123750) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
View our latest analysis for Alton SportsLtd
What Is Alton SportsLtd's Net Debt?
As you can see below, Alton SportsLtd had ₩15.3b of debt at September 2019, down from ₩26.2b a year prior. However, it also had ₩6.75b in cash, and so its net debt is ₩8.55b.
How Healthy Is Alton SportsLtd's Balance Sheet?
According to the last reported balance sheet, Alton SportsLtd had liabilities of ₩21.2b due within 12 months, and liabilities of ₩485.1m due beyond 12 months. Offsetting these obligations, it had cash of ₩6.75b as well as receivables valued at ₩10.3b due within 12 months. So it has liabilities totalling ₩4.64b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Alton SportsLtd has a market capitalization of ₩14.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Alton SportsLtd 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.
Over 12 months, Alton SportsLtd made a loss at the EBIT level, and saw its revenue drop to ₩39b, which is a fall of 14%. We would much prefer see growth.
Caveat Emptor
Not only did Alton SportsLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩8.1b 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₩14b into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Alton SportsLtd you should be aware of, and 1 of them can't be ignored.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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