Is AltonLtd (KOSDAQ:123750) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Alton Co.,Ltd. (KOSDAQ:123750) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AltonLtd

What Is AltonLtd's Net Debt?

The image below, which you can click on for greater detail, shows that AltonLtd had debt of ₩6.00b at the end of September 2024, a reduction from ₩6.36b over a year. However, its balance sheet shows it holds ₩14.0b in cash, so it actually has ₩7.98b net cash.

How Strong Is AltonLtd's Balance Sheet?

The latest balance sheet data shows that AltonLtd had liabilities of ₩12.1b due within a year, and liabilities of ₩544.4m falling due after that. On the other hand, it had cash of ₩14.0b and ₩3.70b worth of receivables due within a year. So it actually has ₩5.02b more liquid assets than total liabilities.

It's good to see that AltonLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, AltonLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since AltonLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, AltonLtd made a loss at the EBIT level, and saw its revenue drop to ₩25b, which is a fall of 44%. That makes us nervous, to say the least.

So How Risky Is AltonLtd?

Although AltonLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩3.3b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - AltonLtd has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.