Boditech Med (KOSDAQ:206640) Seems To Use Debt Rather Sparingly

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. As with many other companies Boditech Med Inc. (KOSDAQ:206640) makes use of debt. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Boditech Med

What Is Boditech Med's Net Debt?

As you can see below, Boditech Med had ₩10.4b of debt at September 2020, down from ₩14.2b a year prior. But it also has ₩43.1b in cash to offset that, meaning it has ₩32.7b net cash.

A Look At Boditech Med's Liabilities

The latest balance sheet data shows that Boditech Med had liabilities of ₩24.7b due within a year, and liabilities of ₩5.63b falling due after that. Offsetting these obligations, it had cash of ₩43.1b as well as receivables valued at ₩23.6b due within 12 months. So it can boast ₩36.3b more liquid assets than total liabilities.

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

Better yet, Boditech Med grew its EBIT by 213% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Boditech Med'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Boditech Med 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. During the last three years, Boditech Med produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Boditech Med has net cash of ₩32.7b, as well as more liquid assets than liabilities. And we liked the look of last year's 213% year-on-year EBIT growth. So we don't think Boditech Med's use of debt is risky. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Boditech Med , 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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