BORATR (KOSDAQ:250000) Seems To Use Debt Quite Sensibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies BORATR CO., Ltd. (KOSDAQ:250000) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

Check out our latest analysis for BORATR

What Is BORATR's Debt?

As you can see below, BORATR had ₩20.8b of debt at December 2020, down from ₩25.1b a year prior. But on the other hand it also has ₩32.9b in cash, leading to a ₩12.1b net cash position.

How Strong Is BORATR's Balance Sheet?

According to the last reported balance sheet, BORATR had liabilities of ₩26.2b due within 12 months, and liabilities of ₩312.7m due beyond 12 months. On the other hand, it had cash of ₩32.9b and ₩5.99b worth of receivables due within a year. So it actually has ₩12.4b more liquid assets than total liabilities.

This surplus suggests that BORATR has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, BORATR boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that BORATR grew its EBIT at 16% over the last year, further increasing its ability to manage debt. 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 BORATR 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. BORATR may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, BORATR burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case BORATR has ₩12.1b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 16% over the last year. So we don't have any problem with BORATR's use of debt. 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. We've identified 5 warning signs with BORATR (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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