Quality Reliability Technology (KOSDAQ:405100) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Quality Reliability Technology Inc. (KOSDAQ:405100) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Quality Reliability Technology

What Is Quality Reliability Technology's Debt?

As you can see below, Quality Reliability Technology had ₩17.4b of debt at June 2024, down from ₩27.4b a year prior. But it also has ₩43.6b in cash to offset that, meaning it has ₩26.1b net cash.

A Look At Quality Reliability Technology's Liabilities

We can see from the most recent balance sheet that Quality Reliability Technology had liabilities of ₩24.6b falling due within a year, and liabilities of ₩16.2b due beyond that. On the other hand, it had cash of ₩43.6b and ₩8.32b worth of receivables due within a year. So it can boast ₩11.1b 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. 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.

It is just as well that Quality Reliability Technology's load is not too heavy, because its EBIT was down 65% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Quality Reliability Technology's ability to maintain a healthy balance sheet going forward. 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. While Quality Reliability Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Quality Reliability Technology saw substantial negative free cash flow, in total. 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 we empathize with investors who find debt concerning, you should keep in mind that Quality Reliability Technology has net cash of ₩26.1b, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Quality Reliability Technology's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Quality Reliability Technology that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.