Would Alpha Holdings (KOSDAQ:117670) Be Better Off With Less 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. Importantly, Alpha Holdings, Inc. (KOSDAQ:117670) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Alpha Holdings

What Is Alpha Holdings's Debt?

As you can see below, Alpha Holdings had ₩45.4b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₩1.14b in cash leading to net debt of about ₩44.3b.

A Look At Alpha Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Alpha Holdings had liabilities of ₩51.0b due within 12 months and liabilities of ₩14.8b due beyond that. Offsetting these obligations, it had cash of ₩1.14b as well as receivables valued at ₩25.4b due within 12 months. So its liabilities total ₩39.2b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Alpha Holdings is worth ₩98.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Alpha Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Alpha Holdings had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to ₩70b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Alpha Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩6.2b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Alpha Holdings has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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. 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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