Is ASTORYLtd (KOSDAQ:241840) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that ASTORY Co.,Ltd (KOSDAQ:241840) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ASTORYLtd

What Is ASTORYLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ASTORYLtd had ₩7.19b of debt in September 2024, down from ₩12.0b, one year before. But on the other hand it also has ₩26.4b in cash, leading to a ₩19.2b net cash position.

A Look At ASTORYLtd's Liabilities

The latest balance sheet data shows that ASTORYLtd had liabilities of ₩18.6b due within a year, and liabilities of ₩905.8m falling due after that. Offsetting this, it had ₩26.4b in cash and ₩573.6m in receivables that were due within 12 months. So it actually has ₩7.54b more liquid assets than total liabilities.

This short term liquidity is a sign that ASTORYLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ASTORYLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

It is well worth noting that ASTORYLtd's EBIT shot up like bamboo after rain, gaining 64% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ASTORYLtd will need earnings to service that debt. 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 ASTORYLtd 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, ASTORYLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case ASTORYLtd has ₩19.2b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 178% of that EBIT to free cash flow, bringing in ₩16b. So we don't think ASTORYLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for ASTORYLtd (1 is potentially serious) 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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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.