Rock star Growth Puts Oscotec (KOSDAQ:039200) In A Position To Use 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 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. We note that Oscotec Inc. (KOSDAQ:039200) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Oscotec

How Much Debt Does Oscotec Carry?

You can click the graphic below for the historical numbers, but it shows that Oscotec had ₩12.3b of debt in September 2024, down from ₩18.8b, one year before. But it also has ₩109.5b in cash to offset that, meaning it has ₩97.2b net cash.

How Healthy Is Oscotec's Balance Sheet?

We can see from the most recent balance sheet that Oscotec had liabilities of ₩29.6b falling due within a year, and liabilities of ₩3.56b due beyond that. Offsetting these obligations, it had cash of ₩109.5b as well as receivables valued at ₩29.4b due within 12 months. So it actually has ₩105.7b more liquid assets than total liabilities.

This short term liquidity is a sign that Oscotec could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 ultimately the future profitability of the business will decide if Oscotec 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.

In the last year Oscotec wasn't profitable at an EBIT level, but managed to grow its revenue by 431%, to ₩32b. That's virtually the hole-in-one of revenue growth!

So How Risky Is Oscotec?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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 ₩20b and booked a ₩4.9b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩97.2b. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, Oscotec's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. For riskier companies like Oscotec I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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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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.