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.' 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 can see that eSang Networks Co.,Ltd (KOSDAQ:080010) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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. 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 eSang NetworksLtd
What Is eSang NetworksLtd's Debt?
As you can see below, eSang NetworksLtd had ₩20.7b of debt at September 2020, down from ₩35.0b a year prior. However, its balance sheet shows it holds ₩31.5b in cash, so it actually has ₩10.8b net cash.
How Healthy Is eSang NetworksLtd's Balance Sheet?
We can see from the most recent balance sheet that eSang NetworksLtd had liabilities of ₩32.2b falling due within a year, and liabilities of ₩15.5b due beyond that. Offsetting this, it had ₩31.5b in cash and ₩6.03b in receivables that were due within 12 months. So it has liabilities totalling ₩10.2b more than its cash and near-term receivables, combined.
Of course, eSang NetworksLtd has a market capitalization of ₩64.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, eSang NetworksLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.
Importantly, eSang NetworksLtd's EBIT fell a jaw-dropping 97% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is eSang NetworksLtd's earnings that will influence how the balance sheet holds up in the future. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While eSang NetworksLtd 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. During the last three years, eSang NetworksLtd 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 eSang NetworksLtd does have more liabilities than liquid assets, it also has net cash of ₩10.8b. Despite the cash, we do find eSang NetworksLtd's EBIT growth rate concerning, so we're not particularly comfortable with the stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for eSang NetworksLtd that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
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About KOSDAQ:A080010
Flawless balance sheet and good value.
