Actoz SoftLtd (KOSDAQ:052790) Could Easily Take On More Debt

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.' 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. As with many other companies Actoz Soft Co.,Ltd. (KOSDAQ:052790) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Actoz SoftLtd

What Is Actoz SoftLtd's Debt?

As you can see below, Actoz SoftLtd had ₩9.52b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩95.8b in cash to offset that, meaning it has ₩86.3b net cash.

How Healthy Is Actoz SoftLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Actoz SoftLtd had liabilities of ₩57.5b due within 12 months and liabilities of ₩3.08b due beyond that. Offsetting this, it had ₩95.8b in cash and ₩24.9b in receivables that were due within 12 months. So it actually has ₩60.2b more liquid assets than total liabilities.

This surplus strongly suggests that Actoz SoftLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Actoz SoftLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Actoz SoftLtd grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Actoz SoftLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Actoz SoftLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Actoz SoftLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Actoz SoftLtd has net cash of ₩86.3b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩26b, being 124% of its EBIT. At the end of the day we're not concerned about Actoz SoftLtd's debt. 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. For example - Actoz SoftLtd has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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