Is Asia Business Daily (KOSDAQ:127710) Using Too Much Debt?

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. As with many other companies The Asia Business Daily Co., Ltd. (KOSDAQ:127710) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Asia Business Daily

What Is Asia Business Daily's Debt?

The image below, which you can click on for greater detail, shows that Asia Business Daily had debt of ₩19.3b at the end of September 2020, a reduction from ₩20.2b over a year. But on the other hand it also has ₩25.4b in cash, leading to a ₩6.11b net cash position.

How Strong Is Asia Business Daily's Balance Sheet?

We can see from the most recent balance sheet that Asia Business Daily had liabilities of ₩44.6b falling due within a year, and liabilities of ₩8.05b due beyond that. Offsetting this, it had ₩25.4b in cash and ₩37.0b in receivables that were due within 12 months. So it actually has ₩9.76b more liquid assets than total liabilities.

This surplus suggests that Asia Business Daily is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Asia Business Daily boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Asia Business Daily grew its EBIT by 91% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Asia Business Daily'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Asia Business Daily 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. Over the last three years, Asia Business Daily saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Asia Business Daily has net cash of ₩6.11b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 91% over the last year. So is Asia Business Daily's debt a risk? It doesn't seem so to us. 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 instance, we've identified 3 warning signs for Asia Business Daily (1 doesn't sit too well with us) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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