Quality Reliability Technology (KOSDAQ:405100) Has A Pretty Healthy Balance Sheet

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. Importantly, Quality Reliability Technology Inc. (KOSDAQ:405100) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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 Quality Reliability Technology

What Is Quality Reliability Technology's Net Debt?

As you can see below, at the end of September 2024, Quality Reliability Technology had ₩16.7b of debt, up from ₩13.5b a year ago. Click the image for more detail. But it also has ₩39.1b in cash to offset that, meaning it has ₩22.4b net cash.

A Look At Quality Reliability Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Quality Reliability Technology had liabilities of ₩25.7b due within 12 months and liabilities of ₩16.4b due beyond that. Offsetting this, it had ₩39.1b in cash and ₩7.19b in receivables that were due within 12 months. So it actually has ₩4.21b more liquid assets than total liabilities.

This short term liquidity is a sign that Quality Reliability Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Quality Reliability Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Also relevant is that Quality Reliability Technology has grown its EBIT by a very respectable 21% in the last year, thus enhancing its ability to pay down debt. 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 Quality Reliability 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.

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 ₩22.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 21% over the last year. So we are not troubled with Quality Reliability Technology's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Quality Reliability Technology that you should be aware of before investing here.

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.