We Think ASFLOW (KOSDAQ:159010) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that ASFLOW Co., LTD. (KOSDAQ:159010) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 ASFLOW

What Is ASFLOW's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 ASFLOW had ₩62.0b of debt, an increase on ₩47.9b, over one year. On the flip side, it has ₩18.6b in cash leading to net debt of about ₩43.4b.

How Strong Is ASFLOW's Balance Sheet?

The latest balance sheet data shows that ASFLOW had liabilities of ₩54.6b due within a year, and liabilities of ₩22.6b falling due after that. Offsetting this, it had ₩18.6b in cash and ₩26.2b in receivables that were due within 12 months. So it has liabilities totalling ₩32.4b more than its cash and near-term receivables, combined.

This deficit isn't so bad because ASFLOW is worth ₩64.0b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ASFLOW can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, ASFLOW made a loss at the EBIT level, and saw its revenue drop to ₩83b, which is a fall of 10.0%. We would much prefer see growth.

Caveat Emptor

Importantly, ASFLOW had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩1.8b 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩5.8b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with ASFLOW (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.