P&H Tech (KOSDAQ:239890) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 P&H Tech Co., Ltd. (KOSDAQ:239890) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for P&H Tech

What Is P&H Tech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that P&H Tech had ₩11.5b of debt in September 2024, down from ₩19.0b, one year before. However, it does have ₩24.8b in cash offsetting this, leading to net cash of ₩13.3b.

A Look At P&H Tech's Liabilities

The latest balance sheet data shows that P&H Tech had liabilities of ₩16.5b due within a year, and liabilities of ₩3.94b falling due after that. Offsetting this, it had ₩24.8b in cash and ₩1.82b in receivables that were due within 12 months. So it actually has ₩6.18b more liquid assets than total liabilities.

This short term liquidity is a sign that P&H Tech could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that P&H Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for P&H Tech if management cannot prevent a repeat of the 27% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine P&H Tech'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. P&H Tech 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. Considering the last three years, P&H Tech actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that P&H Tech has net cash of ₩13.3b, as well as more liquid assets than liabilities. So while P&H Tech does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for P&H Tech you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.