Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies DRTECH Corporation (KOSDAQ:214680) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for DRTECH
What Is DRTECH's Net Debt?
As you can see below, at the end of September 2020, DRTECH had ₩40.9b of debt, up from ₩17.6b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩21.5b, its net debt is less, at about ₩19.4b.
How Healthy Is DRTECH's Balance Sheet?
We can see from the most recent balance sheet that DRTECH had liabilities of ₩26.2b falling due within a year, and liabilities of ₩30.3b due beyond that. Offsetting these obligations, it had cash of ₩21.5b as well as receivables valued at ₩17.1b due within 12 months. So it has liabilities totalling ₩17.9b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since DRTECH has a market capitalization of ₩74.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since DRTECH 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.
In the last year DRTECH wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to ₩54b. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Over the last twelve months DRTECH produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩918m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩8.0b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that DRTECH is showing 2 warning signs in our investment analysis , you should know about...
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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About KOSDAQ:A214680
DRTECH
Develops and sells flat-panel X-ray detectors for digital radiography in South Korea and internationally.
Adequate balance sheet low.
