APS Holdings (KOSDAQ:054620) Is Carrying A Fair Bit Of Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that APS Holdings Corporation (KOSDAQ:054620) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for APS Holdings

What Is APS Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 APS Holdings had debt of ₩83.8b, up from ₩40.5b in one year. However, it does have ₩31.1b in cash offsetting this, leading to net debt of about ₩52.6b.

How Strong Is APS Holdings' Balance Sheet?

The latest balance sheet data shows that APS Holdings had liabilities of ₩26.9b due within a year, and liabilities of ₩74.0b falling due after that. On the other hand, it had cash of ₩31.1b and ₩2.73b worth of receivables due within a year. So it has liabilities totalling ₩66.9b more than its cash and near-term receivables, combined.

APS Holdings has a market capitalization of ₩138.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since APS Holdings 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.

Over 12 months, APS Holdings made a loss at the EBIT level, and saw its revenue drop to ₩24b, which is a fall of 11%. That's not what we would hope to see.

Caveat Emptor

Not only did APS Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩11b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩26b of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - APS Holdings has 1 warning sign we think 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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