InkTec (KOSDAQ:049550) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that InkTec Co., Ltd. (KOSDAQ:049550) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for InkTec

What Is InkTec's Net Debt?

The image below, which you can click on for greater detail, shows that InkTec had debt of ₩38.7b at the end of September 2020, a reduction from ₩44.6b over a year. On the flip side, it has ₩1.80b in cash leading to net debt of about ₩36.9b.

How Strong Is InkTec's Balance Sheet?

The latest balance sheet data shows that InkTec had liabilities of ₩34.8b due within a year, and liabilities of ₩27.2b falling due after that. Offsetting these obligations, it had cash of ₩1.80b as well as receivables valued at ₩9.30b due within 12 months. So its liabilities total ₩50.8b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩67.2b, so it does suggest shareholders should keep an eye on InkTec's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is InkTec'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.

Over 12 months, InkTec made a loss at the EBIT level, and saw its revenue drop to ₩50b, which is a fall of 13%. We would much prefer see growth.

Caveat Emptor

While InkTec's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩1.7b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩2.7b. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for InkTec that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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