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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that ADTechnology Co.,Ltd. (KOSDAQ:200710) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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.

See 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, its balance sheet shows it holds ₩89.4b in cash, so it actually has ₩31.4b net cash.

A Look At ADTechnologyLtd's Liabilities

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 this, it had ₩89.4b in cash and ₩8.12b in receivables that were due within 12 months. So its liabilities total ₩8.24b more than the combination of its cash and short-term receivables.

Since publicly traded ADTechnologyLtd shares are worth a total of ₩246.9b, it seems unlikely that this level of liabilities would be a major threat. 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 ADTechnologyLtd'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, ADTechnologyLtd reported revenue of ₩125b, which is a gain of 54%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is ADTechnologyLtd?

While ADTechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩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. For instance, we've identified 2 warning signs for ADTechnologyLtd (1 is significant) you should be aware of.

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.