Is AUTO& (KOSDAQ:353590) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, AUTO& Inc. (KOSDAQ:353590) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for AUTO&

What Is AUTO&'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 AUTO& had ₩17.2b of debt, an increase on ₩11.6b, over one year. However, its balance sheet shows it holds ₩25.1b in cash, so it actually has ₩7.93b net cash.

A Look At AUTO&'s Liabilities

Zooming in on the latest balance sheet data, we can see that AUTO& had liabilities of ₩35.9b due within 12 months and liabilities of ₩2.87b due beyond that. Offsetting these obligations, it had cash of ₩25.1b as well as receivables valued at ₩11.2b due within 12 months. So it has liabilities totalling ₩2.47b more than its cash and near-term receivables, combined.

Of course, AUTO& has a market capitalization of ₩104.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, AUTO& also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is AUTO&'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.

Over 12 months, AUTO& reported revenue of ₩59b, which is a gain of 23%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is AUTO&?

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 AUTO& lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩1.4b of cash and made a loss of ₩53m. While this does make the company a bit risky, it's important to remember it has net cash of ₩7.93b. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, AUTO& may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should be aware of the 2 warning signs we've spotted with AUTO& .

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.