Would Protec Mems Technology (KOSDAQ:147760) Be Better Off With Less Debt?

Warren Buffett famously said, '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 note that Protec Mems Technology Inc. (KOSDAQ:147760) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Protec Mems Technology

What Is Protec Mems Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Protec Mems Technology had ₩23.6b of debt, an increase on ₩11.9b, over one year. However, because it has a cash reserve of ₩6.12b, its net debt is less, at about ₩17.4b.

How Healthy Is Protec Mems Technology's Balance Sheet?

The latest balance sheet data shows that Protec Mems Technology had liabilities of ₩23.1b due within a year, and liabilities of ₩7.04b falling due after that. Offsetting these obligations, it had cash of ₩6.12b as well as receivables valued at ₩3.63b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩20.4b.

This is a mountain of leverage relative to its market capitalization of ₩32.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Protec Mems Technology'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.

Over 12 months, Protec Mems Technology reported revenue of ₩31b, which is a gain of 4.4%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Protec Mems Technology produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₩9.8b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩11b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Protec Mems Technology (2 can't be ignored!) that you should be aware of before investing here.

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. 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.