Is Quality Reliability Technology (KOSDAQ:405100) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Quality Reliability Technology Inc. (KOSDAQ:405100) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Quality Reliability Technology

What Is Quality Reliability Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Quality Reliability Technology had ₩15.2b of debt in March 2024, down from ₩27.3b, one year before. But it also has ₩52.4b in cash to offset that, meaning it has ₩37.2b net cash.

How Healthy Is Quality Reliability Technology's Balance Sheet?

We can see from the most recent balance sheet that Quality Reliability Technology had liabilities of ₩29.7b falling due within a year, and liabilities of ₩14.6b due beyond that. On the other hand, it had cash of ₩52.4b and ₩7.08b worth of receivables due within a year. So it can boast ₩15.1b more liquid assets than total liabilities.

This surplus suggests that Quality Reliability Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Quality Reliability Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Quality Reliability Technology if management cannot prevent a repeat of the 93% 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Quality Reliability 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Quality Reliability 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. During the last three years, Quality Reliability 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

While it is always sensible to investigate a company's debt, in this case Quality Reliability Technology has ₩37.2b in net cash and a decent-looking balance sheet. So while Quality Reliability Technology does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for Quality Reliability Technology (3 are a bit unpleasant!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com