ADTechnologyLtd (KOSDAQ:200710) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies ADTechnology Co.,Ltd. (KOSDAQ:200710) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for ADTechnologyLtd

What Is ADTechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that ADTechnologyLtd had debt of ₩58.0b at the end of September 2024, a reduction from ₩61.1b over a year. However, it does have ₩89.4b in cash offsetting this, leading to net cash of ₩31.4b.

How Healthy Is ADTechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ADTechnologyLtd had liabilities of ₩71.2b due within 12 months and liabilities of ₩34.6b due beyond that. Offsetting these obligations, it had cash of ₩89.4b as well as receivables valued at ₩8.12b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩8.24b.

Of course, ADTechnologyLtd has a market capitalization of ₩157.5b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, ADTechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine ADTechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year ADTechnologyLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 54%, to ₩125b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is ADTechnologyLtd?

Although ADTechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩7.0b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that ADTechnologyLtd is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat risky. 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. Case in point: We've spotted 1 warning sign for ADTechnologyLtd you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.