Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that exax Inc. (KOSDAQ:060230) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for exax
How Much Debt Does exax Carry?
As you can see below, exax had ₩12.1b of debt at September 2020, down from ₩25.9b a year prior. However, it does have ₩20.5b in cash offsetting this, leading to net cash of ₩8.37b.
A Look At exax's Liabilities
The latest balance sheet data shows that exax had liabilities of ₩16.8b due within a year, and liabilities of ₩2.03b falling due after that. Offsetting this, it had ₩20.5b in cash and ₩12.7b in receivables that were due within 12 months. So it actually has ₩14.4b more liquid assets than total liabilities.
This surplus suggests that exax has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, exax boasts net cash, so it's fair to say it does not have a heavy debt load!
Importantly, exax's EBIT fell a jaw-dropping 64% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is exax'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. exax may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, exax actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that exax has net cash of ₩8.37b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩2.2b, being 361% of its EBIT. So we are not troubled with exax's debt use. 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. Take risks, for example - exax has 1 warning sign we think you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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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About KOSDAQ:A060230
Sonid
Manufactures and sells chemicals, electronic materials, electronics components, and displays in South Korea, China, Vietnam, and internationally.
Adequate balance sheet low.