M.I.TECHLtd (KOSDAQ:179290) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, M.I.TECH Co.,Ltd (KOSDAQ:179290) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for M.I.TECHLtd

What Is M.I.TECHLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 M.I.TECHLtd had debt of ₩6.00b, up from ₩3.00b in one year. However, it does have ₩20.1b in cash offsetting this, leading to net cash of ₩14.1b.

How Healthy Is M.I.TECHLtd's Balance Sheet?

According to the last reported balance sheet, M.I.TECHLtd had liabilities of ₩8.37b due within 12 months, and liabilities of ₩3.22b due beyond 12 months. Offsetting this, it had ₩20.1b in cash and ₩9.46b in receivables that were due within 12 months. So it can boast ₩17.9b more liquid assets than total liabilities.

This short term liquidity is a sign that M.I.TECHLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that M.I.TECHLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, M.I.TECHLtd grew its EBIT by 74% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is M.I.TECHLtd'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 company can only pay off debt with cold hard cash, not accounting profits. M.I.TECHLtd 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. Over the last three years, M.I.TECHLtd recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While it is always sensible to investigate a company's debt, in this case M.I.TECHLtd has ₩14.1b in net cash and a decent-looking balance sheet. And we liked the look of last year's 74% year-on-year EBIT growth. So is M.I.TECHLtd's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - M.I.TECHLtd has 2 warning signs we think 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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