Is ODTech (KOSDAQ:080520) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ODTech Co., Ltd. (KOSDAQ:080520) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for ODTech

What Is ODTech's Net Debt?

The image below, which you can click on for greater detail, shows that ODTech had debt of ₩5.49b at the end of March 2024, a reduction from ₩7.01b over a year. However, it does have ₩54.3b in cash offsetting this, leading to net cash of ₩48.9b.

How Healthy Is ODTech's Balance Sheet?

According to the last reported balance sheet, ODTech had liabilities of ₩13.4b due within 12 months, and liabilities of ₩1.11b due beyond 12 months. Offsetting this, it had ₩54.3b in cash and ₩11.3b in receivables that were due within 12 months. So it can boast ₩51.2b more liquid assets than total liabilities.

This luscious liquidity implies that ODTech's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that ODTech has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since ODTech will need earnings to service that debt. 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.

In the last year ODTech had a loss before interest and tax, and actually shrunk its revenue by 9.8%, to ₩34b. That's not what we would hope to see.

So How Risky Is ODTech?

Although ODTech had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩10b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. 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. We've identified 4 warning signs with ODTech (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.