We Think ABOV Semiconductor (KOSDAQ:102120) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, ABOV Semiconductor Co., Ltd. (KOSDAQ:102120) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ABOV Semiconductor

How Much Debt Does ABOV Semiconductor Carry?

The image below, which you can click on for greater detail, shows that at December 2020 ABOV Semiconductor had debt of ₩21.8b, up from none in one year. However, it does have ₩72.7b in cash offsetting this, leading to net cash of ₩51.0b.

A Look At ABOV Semiconductor's Liabilities

We can see from the most recent balance sheet that ABOV Semiconductor had liabilities of ₩36.9b falling due within a year, and liabilities of ₩1.86b due beyond that. Offsetting this, it had ₩72.7b in cash and ₩15.1b in receivables that were due within 12 months. So it actually has ₩49.1b more liquid assets than total liabilities.

It's good to see that ABOV Semiconductor has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, ABOV Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, ABOV Semiconductor grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. 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 ABOV Semiconductor 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ABOV Semiconductor may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, ABOV Semiconductor actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that ABOV Semiconductor has net cash of ₩51.0b, as well as more liquid assets than liabilities. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in ₩20b. When it comes to ABOV Semiconductor's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for ABOV Semiconductor you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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