Is ADTechnologyLtd (KOSDAQ:200710) Using Too Much Debt?

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. Importantly, ADTechnology Co.,Ltd. (KOSDAQ:200710) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ADTechnologyLtd

What Is ADTechnologyLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 ADTechnologyLtd had debt of ₩50.2b, up from ₩20.6b in one year. But it also has ₩94.7b in cash to offset that, meaning it has ₩44.5b net cash.

How Strong Is ADTechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that ADTechnologyLtd had liabilities of ₩75.2b falling due within a year, and liabilities of ₩5.62b due beyond that. Offsetting these obligations, it had cash of ₩94.7b as well as receivables valued at ₩12.3b due within 12 months. So it can boast ₩26.1b more liquid assets than total liabilities.

This short term liquidity is a sign that ADTechnologyLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ADTechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, ADTechnologyLtd grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is ADTechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. ADTechnologyLtd 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, ADTechnologyLtd 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 ADTechnologyLtd has ₩44.5b in net cash and a decent-looking balance sheet. And we liked the look of last year's 35% year-on-year EBIT growth. So we are not troubled with ADTechnologyLtd'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. Take risks, for example - ADTechnologyLtd has 4 warning signs (and 1 which is concerning) we think you should know about.

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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