Is AUROS Technology (KOSDAQ:322310) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies AUROS Technology, Inc. (KOSDAQ:322310) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AUROS Technology

What Is AUROS Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 AUROS Technology had ₩10.2b of debt, an increase on none, over one year. But it also has ₩11.3b in cash to offset that, meaning it has ₩1.13b net cash.

How Strong Is AUROS Technology's Balance Sheet?

We can see from the most recent balance sheet that AUROS Technology had liabilities of ₩25.4b falling due within a year, and liabilities of ₩6.50b due beyond that. Offsetting this, it had ₩11.3b in cash and ₩4.69b in receivables that were due within 12 months. So its liabilities total ₩15.9b more than the combination of its cash and short-term receivables.

Given AUROS Technology has a market capitalization of ₩180.9b, it's hard to believe these liabilities pose much 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, AUROS Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that AUROS Technology's load is not too heavy, because its EBIT was down 47% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. AUROS Technology 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. Over the last two years, AUROS Technology saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far 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 ₩1.13b. So although we see some areas for improvement, we're not too worried about AUROS Technology's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with AUROS Technology , and understanding them should be part of your investment process.

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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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.