BIT Computer (KOSDAQ:032850) Has A Rock Solid Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 BIT Computer Co., Ltd (KOSDAQ:032850) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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.

See our latest analysis for BIT Computer

What Is BIT Computer's Net Debt?

As you can see below, at the end of September 2020, BIT Computer had ₩5.75b of debt, up from ₩4.75b a year ago. Click the image for more detail. But on the other hand it also has ₩14.2b in cash, leading to a ₩8.41b net cash position.

A Look At BIT Computer's Liabilities

We can see from the most recent balance sheet that BIT Computer had liabilities of ₩9.33b falling due within a year, and liabilities of ₩7.04b due beyond that. Offsetting this, it had ₩14.2b in cash and ₩4.61b in receivables that were due within 12 months. So it can boast ₩2.40b more liquid assets than total liabilities.

Having regard to BIT Computer's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩153.1b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, BIT Computer boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that BIT Computer grew its EBIT by 400% over twelve months. That boost will make it even easier to pay down debt going forward. 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 BIT Computer 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While BIT Computer 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, BIT Computer recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case BIT Computer has ₩8.41b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩8.1b, being 88% of its EBIT. So we don't think BIT Computer's use of debt is risky. 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. We've identified 2 warning signs with BIT Computer , and understanding them should be part of your investment process.

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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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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