Is ASTORYLtd (KOSDAQ:241840) A Risky Investment?

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. As with many other companies ASTORY Co.,Ltd (KOSDAQ:241840) makes use of debt. But is this debt a concern to shareholders?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ASTORYLtd

What Is ASTORYLtd's Net Debt?

The image below, which you can click on for greater detail, shows that ASTORYLtd had debt of ₩12.4b at the end of March 2024, a reduction from ₩14.1b over a year. But on the other hand it also has ₩25.8b in cash, leading to a ₩13.4b net cash position.

How Strong Is ASTORYLtd's Balance Sheet?

According to the last reported balance sheet, ASTORYLtd had liabilities of ₩28.9b due within 12 months, and liabilities of ₩977.8m due beyond 12 months. On the other hand, it had cash of ₩25.8b and ₩4.43b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to ASTORYLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩86.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, ASTORYLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that ASTORYLtd's EBIT shot up like bamboo after rain, gaining 70% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ASTORYLtd will need earnings to service that debt. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ASTORYLtd 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. During the last three years, ASTORYLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ASTORYLtd has net cash of ₩13.4b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 70% over the last year. So we are not troubled with ASTORYLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for ASTORYLtd (1 is a bit concerning) you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com