Is ITEK (KOSDAQ:119830) Weighed On By Its Debt Load?

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 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. We can see that ITEK, Inc. (KOSDAQ:119830) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ITEK

What Is ITEK's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 ITEK had debt of ₩28.1b, up from ₩13.7b in one year. However, its balance sheet shows it holds ₩89.2b in cash, so it actually has ₩61.1b net cash.

A Look At ITEK's Liabilities

We can see from the most recent balance sheet that ITEK had liabilities of ₩54.2b falling due within a year, and liabilities of ₩8.74b due beyond that. Offsetting this, it had ₩89.2b in cash and ₩11.6b in receivables that were due within 12 months. So it actually has ₩37.8b more liquid assets than total liabilities.

This surplus suggests that ITEK is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, ITEK boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is ITEK'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 ITEK wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to ₩77b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is ITEK?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year ITEK had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩6.8b and booked a ₩14b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩61.1b. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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, we've discovered 1 warning sign for ITEK that you should be aware of before investing here.

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.