Does Infraware (KOSDAQ:041020) Have A Healthy Balance Sheet?

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 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. Importantly, Infraware, Inc. (KOSDAQ:041020) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Infraware

How Much Debt Does Infraware Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Infraware had debt of ₩7.00b, up from ₩1.25b in one year. But it also has ₩19.5b in cash to offset that, meaning it has ₩12.5b net cash.

How Strong Is Infraware's Balance Sheet?

The latest balance sheet data shows that Infraware had liabilities of ₩10.8b due within a year, and liabilities of ₩1.49b falling due after that. Offsetting this, it had ₩19.5b in cash and ₩2.54b in receivables that were due within 12 months. So it can boast ₩9.69b more liquid assets than total liabilities.

This surplus suggests that Infraware has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Infraware boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Infraware 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.

In the last year Infraware had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to ₩20b. That's not what we would hope to see.

So How Risky Is Infraware?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Infraware had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩6.9b of cash and made a loss of ₩4.3b. But at least it has ₩12.5b on the balance sheet to spend on growth, near-term. 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. Case in point: We've spotted 2 warning signs for Infraware you should be aware of.

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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