Advanced Nano Products (KOSDAQ:121600) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Advanced Nano Products Co., Ltd. (KOSDAQ:121600) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Advanced Nano Products

How Much Debt Does Advanced Nano Products Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Advanced Nano Products had ₩7.20b of debt, an increase on ₩1.20b, over one year. But on the other hand it also has ₩26.3b in cash, leading to a ₩19.1b net cash position.

How Strong Is Advanced Nano Products's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Advanced Nano Products had liabilities of ₩8.61b due within 12 months and liabilities of ₩5.71b due beyond that. On the other hand, it had cash of ₩26.3b and ₩9.59b worth of receivables due within a year. So it can boast ₩21.5b more liquid assets than total liabilities.

This short term liquidity is a sign that Advanced Nano Products could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Advanced Nano Products has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Advanced Nano Products's saving grace is its low debt levels, because its EBIT has tanked 57% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Advanced Nano Products can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Advanced Nano Products 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. In the last three years, Advanced Nano Products created free cash flow amounting to 18% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Advanced Nano Products has ₩19.1b in net cash and a decent-looking balance sheet. So we are not troubled with Advanced Nano Products's debt use. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Advanced Nano Products (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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