Health Check: How Prudently Does RF Materials (KOSDAQ:327260) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that RF Materials Co., Ltd. (KOSDAQ:327260) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 RF Materials

What Is RF Materials's Net Debt?

The image below, which you can click on for greater detail, shows that RF Materials had debt of ₩17.2b at the end of June 2024, a reduction from ₩26.1b over a year. However, it does have ₩50.1b in cash offsetting this, leading to net cash of ₩32.9b.

How Healthy Is RF Materials' Balance Sheet?

We can see from the most recent balance sheet that RF Materials had liabilities of ₩38.6b falling due within a year, and liabilities of ₩1.74b due beyond that. On the other hand, it had cash of ₩50.1b and ₩7.13b worth of receivables due within a year. So it can boast ₩16.9b more liquid assets than total liabilities.

This excess liquidity is a great indication that RF Materials' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, RF Materials boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since RF Materials will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, RF Materials made a loss at the EBIT level, and saw its revenue drop to ₩45b, which is a fall of 16%. That's not what we would hope to see.

So How Risky Is RF Materials?

Although RF Materials had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩4.1b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 1 warning sign for RF Materials you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.