ITEK (KOSDAQ:119830) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, ITEK, Inc. (KOSDAQ:119830) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for ITEK

How Much Debt Does ITEK Carry?

As you can see below, at the end of December 2020, ITEK had ₩34.3b of debt, up from ₩32.0b a year ago. Click the image for more detail. However, it does have ₩63.8b in cash offsetting this, leading to net cash of ₩29.5b.

How Strong Is ITEK's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ITEK had liabilities of ₩53.6b due within 12 months and liabilities of ₩14.1b due beyond that. On the other hand, it had cash of ₩63.8b and ₩4.82b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to ITEK's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩145.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, ITEK boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, ITEK grew its EBIT by 54% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is ITEK's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ITEK 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. During the last three years, ITEK burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case ITEK has ₩29.5b in net cash and a decent-looking balance sheet. And we liked the look of last year's 54% year-on-year EBIT growth. So we are not troubled with ITEK's debt use. 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 2 warning signs with ITEK (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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