Does N2Tech (KOSDAQ:227950) Have A Healthy Balance Sheet?

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.' 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, N2Tech Co., Ltd (KOSDAQ:227950) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for N2Tech

What Is N2Tech's Debt?

As you can see below, N2Tech had ₩21.3b of debt at December 2020, down from ₩41.4b a year prior. However, because it has a cash reserve of ₩20.6b, its net debt is less, at about ₩645.2m.

How Strong Is N2Tech's Balance Sheet?

The latest balance sheet data shows that N2Tech had liabilities of ₩27.8b due within a year, and liabilities of ₩19.7b falling due after that. Offsetting these obligations, it had cash of ₩20.6b as well as receivables valued at ₩4.65b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩22.1b.

N2Tech has a market capitalization of ₩94.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. But either way, N2Tech has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since N2Tech will need earnings to service that debt. 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.

In the last year N2Tech wasn't profitable at an EBIT level, but managed to grow its revenue by 55%, to ₩54b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, N2Tech still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩1.2b. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩8.7b of cash over the last year. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for N2Tech (of which 1 is concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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