David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 RF Materials Co., Ltd. (KOSDAQ:327260) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.
Check out 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 ₩18.2b at the end of March 2024, a reduction from ₩27.1b over a year. But it also has ₩43.1b in cash to offset that, meaning it has ₩24.9b net cash.
A Look At RF Materials' Liabilities
According to the last reported balance sheet, RF Materials had liabilities of ₩23.8b due within 12 months, and liabilities of ₩10.2b due beyond 12 months. On the other hand, it had cash of ₩43.1b and ₩6.79b worth of receivables due within a year. So it actually has ₩15.9b more liquid assets than total liabilities.
This excess liquidity suggests that RF Materials is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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 it is RF Materials's earnings that will influence how the balance sheet holds up in the future. 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 RF Materials had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₩46b. We would much prefer see growth.
So How Risky Is RF Materials?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year RF Materials had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩3.9b of cash and made a loss of ₩1.2b. With only ₩24.9b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 RF Materials , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
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About KOSDAQ:A327260
RF Materials
Develops, produces, and sells optical communication packages in Korea and internationally.
Mediocre balance sheet and slightly overvalued.