Here's Why Capro (KRX:006380) Can Afford Some Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Capro Corporation (KRX:006380) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Capro

How Much Debt Does Capro Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Capro had debt of ₩122.0b, up from ₩93.0b in one year. However, because it has a cash reserve of ₩77.2b, its net debt is less, at about ₩44.8b.

How Healthy Is Capro's Balance Sheet?

According to the last reported balance sheet, Capro had liabilities of ₩143.3b due within 12 months, and liabilities of ₩39.6b due beyond 12 months. Offsetting these obligations, it had cash of ₩77.2b as well as receivables valued at ₩40.8b due within 12 months. So it has liabilities totalling ₩64.9b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Capro has a market capitalization of ₩168.8b, 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 it is Capro'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, Capro made a loss at the EBIT level, and saw its revenue drop to ₩273b, which is a fall of 45%. That makes us nervous, to say the least.

Caveat Emptor

While Capro's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩81b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩26b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Capro (at least 1 which is significant) , and understanding them should be part of your investment process.

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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