We Think Protec Mems Technology (KOSDAQ:147760) Has A Fair Chunk Of 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Protec Mems Technology Inc. (KOSDAQ:147760) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Protec Mems Technology

How Much Debt Does Protec Mems Technology Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Protec Mems Technology had debt of ₩21.4b, up from ₩10.2b in one year. However, it does have ₩6.18b in cash offsetting this, leading to net debt of about ₩15.3b.

How Strong Is Protec Mems Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Protec Mems Technology had liabilities of ₩21.3b due within 12 months and liabilities of ₩6.18b due beyond that. On the other hand, it had cash of ₩6.18b and ₩1.88b worth of receivables due within a year. So it has liabilities totalling ₩19.4b more than its cash and near-term receivables, combined.

Protec Mems Technology has a market capitalization of ₩45.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Protec Mems Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Protec Mems Technology reported revenue of ₩34b, which is a gain of 4.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Protec Mems Technology produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩7.8b. 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 ₩10b of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Protec Mems Technology (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.