Does Alton SportsLtd (KOSDAQ:123750) Have A Healthy Balance Sheet?

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. As with many other companies Alton Sports Co.,Ltd. (KOSDAQ:123750) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Alton SportsLtd

What Is Alton SportsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Alton SportsLtd had ₩7.63b of debt in September 2020, down from ₩15.3b, one year before. However, its balance sheet shows it holds ₩14.9b in cash, so it actually has ₩7.24b net cash.

How Healthy Is Alton SportsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alton SportsLtd had liabilities of ₩16.6b due within 12 months and liabilities of ₩237.3m due beyond that. On the other hand, it had cash of ₩14.9b and ₩5.43b worth of receivables due within a year. So it can boast ₩3.49b more liquid assets than total liabilities.

This short term liquidity is a sign that Alton SportsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Alton SportsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Alton SportsLtd improved its EBIT from a last year's loss to a positive ₩1.2b. There's no doubt that we learn most about debt from the balance sheet. But it is Alton SportsLtd'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Alton SportsLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Alton SportsLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Alton SportsLtd has net cash of ₩7.24b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩6.8b, being 548% of its EBIT. So we don't think Alton SportsLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Alton SportsLtd 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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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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