We Think DRTECH (KOSDAQ:214680) Has A Fair Chunk Of Debt

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.' 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 should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for DRTECH

What Is DRTECH's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 DRTECH had ₩40.6b of debt, an increase on ₩18.6b, over one year. However, it also had ₩23.8b in cash, and so its net debt is ₩16.8b.

A Look At DRTECH's Liabilities

We can see from the most recent balance sheet that DRTECH had liabilities of ₩29.5b falling due within a year, and liabilities of ₩29.5b due beyond that. On the other hand, it had cash of ₩23.8b and ₩15.4b worth of receivables due within a year. So it has liabilities totalling ₩19.8b 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 ₩82.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. 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 15%, to ₩55b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, DRTECH had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩5.5b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩8.1b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with DRTECH (including 1 which is significant) .

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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