Is Able C&C (KRX:078520) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Able C&C Co., Ltd. (KRX:078520) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, 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 Able C&C

How Much Debt Does Able C&C Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Able C&C had debt of ₩14.1b, up from ₩10.5b in one year. However, its balance sheet shows it holds ₩40.5b in cash, so it actually has ₩26.4b net cash.

How Healthy Is Able C&C's Balance Sheet?

According to the last reported balance sheet, Able C&C had liabilities of ₩65.0b due within 12 months, and liabilities of ₩31.5b due beyond 12 months. Offsetting these obligations, it had cash of ₩40.5b as well as receivables valued at ₩27.8b due within 12 months. So it has liabilities totalling ₩28.2b more than its cash and near-term receivables, combined.

Given Able C&C has a market capitalization of ₩194.1b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Able C&C boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Able C&C 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 Able C&C had a loss before interest and tax, and actually shrunk its revenue by 27%, to ₩308b. That makes us nervous, to say the least.

So How Risky Is Able C&C?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Able C&C lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩16b of cash and made a loss of ₩88b. However, it has net cash of ₩26.4b, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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 Able C&C is showing 1 warning sign in our investment analysis , you should know about...

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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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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