These 4 Measures Indicate That BORATR (KOSDAQ:250000) Is Using Debt Reasonably Well

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.' 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 note that BORATR CO., Ltd. (KOSDAQ:250000) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for BORATR

What Is BORATR's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 BORATR had debt of ₩31.3b, up from ₩22.4b in one year. But on the other hand it also has ₩39.0b in cash, leading to a ₩7.66b net cash position.

How Healthy Is BORATR's Balance Sheet?

We can see from the most recent balance sheet that BORATR had liabilities of ₩35.5b falling due within a year, and liabilities of ₩350.1m due beyond that. On the other hand, it had cash of ₩39.0b and ₩5.87b worth of receivables due within a year. So it can boast ₩9.04b 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!

BORATR's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is BORATR'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While BORATR 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 three years, BORATR saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that BORATR has net cash of ₩7.66b, as well as more liquid assets than liabilities. So we don't have any problem with BORATR's use of debt. 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. Case in point: We've spotted 7 warning signs for BORATR you should be aware of, and 2 of them are potentially serious.

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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