Is Oscotec (KOSDAQ:039200) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Oscotec Inc. (KOSDAQ:039200) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Oscotec

How Much Debt Does Oscotec Carry?

As you can see below, Oscotec had ₩5.91b of debt at September 2020, down from ₩11.6b a year prior. But on the other hand it also has ₩40.3b in cash, leading to a ₩34.4b net cash position.

A Look At Oscotec's Liabilities

The latest balance sheet data shows that Oscotec had liabilities of ₩12.5b due within a year, and liabilities of ₩3.58b falling due after that. Offsetting this, it had ₩40.3b in cash and ₩505.5m in receivables that were due within 12 months. So it actually has ₩24.8b more liquid assets than total liabilities.

Having regard to Oscotec's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩1.72t company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Oscotec has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Oscotec's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Oscotec had a loss before interest and tax, and actually shrunk its revenue by 2.9%, to ₩18b. We would much prefer see growth.

So How Risky Is Oscotec?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Oscotec lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩17b and booked a ₩16b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩34.4b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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, we've discovered 3 warning signs for Oscotec (1 is concerning!) that you should be aware of before investing here.

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.

If you’re looking to trade Oscotec, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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