AfreecaTV (KOSDAQ:067160) Could Easily Take On More Debt

Warren Buffett famously said, '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. Importantly, AfreecaTV Co., Ltd. (KOSDAQ:067160) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for AfreecaTV

What Is AfreecaTV's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 AfreecaTV had ₩10.0b of debt, an increase on ₩9.08b, over one year. However, it does have ₩94.8b in cash offsetting this, leading to net cash of ₩84.8b.

A Look At AfreecaTV's Liabilities

The latest balance sheet data shows that AfreecaTV had liabilities of ₩108.2b due within a year, and liabilities of ₩12.9b falling due after that. Offsetting these obligations, it had cash of ₩94.8b as well as receivables valued at ₩59.5b due within 12 months. So it actually has ₩33.2b more liquid assets than total liabilities.

This surplus suggests that AfreecaTV has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, AfreecaTV boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that AfreecaTV has increased its EBIT by 8.3% over twelve months, which should ease any concerns about debt repayment. 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 AfreecaTV 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 company can only pay off debt with cold hard cash, not accounting profits. While AfreecaTV 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. During the last three years, AfreecaTV generated free cash flow amounting to a very robust 96% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that AfreecaTV has net cash of ₩84.8b, as well as more liquid assets than liabilities. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in ₩35b. So we don't think AfreecaTV's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in AfreecaTV, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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