AUROS Technology (KOSDAQ:322310) Seems To Use Debt Quite Sensibly

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. We note that AUROS Technology, Inc. (KOSDAQ:322310) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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.

Check out our latest analysis for AUROS Technology

What Is AUROS Technology's Net Debt?

As you can see below, at the end of June 2024, AUROS Technology had ₩2.19b of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩2.75b in cash, so it actually has ₩563.1m net cash.

How Healthy Is AUROS Technology's Balance Sheet?

According to the last reported balance sheet, AUROS Technology had liabilities of ₩17.7b due within 12 months, and liabilities of ₩6.16b due beyond 12 months. Offsetting these obligations, it had cash of ₩2.75b as well as receivables valued at ₩5.90b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩15.2b.

Since publicly traded AUROS Technology shares are worth a total of ₩166.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, AUROS Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although AUROS Technology made a loss at the EBIT level, last year, it was also good to see that it generated ₩795m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AUROS Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While AUROS Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, AUROS Technology 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

We could understand if investors are concerned about AUROS Technology's liabilities, but we can be reassured by the fact it has has net cash of ₩563.1m. So we don't have any problem with AUROS Technology's use of debt. 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. For example, we've discovered 2 warning signs for AUROS Technology (1 is significant!) that you should be aware of before investing here.

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.