These 4 Measures Indicate That ESTsoft (KOSDAQ:047560) Is Using Debt Reasonably Well

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 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, ESTsoft Corp. (KOSDAQ:047560) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for ESTsoft

How Much Debt Does ESTsoft Carry?

You can click the graphic below for the historical numbers, but it shows that ESTsoft had ₩32.9b of debt in September 2020, down from ₩34.9b, one year before. However, it does have ₩48.5b in cash offsetting this, leading to net cash of ₩15.6b.

A Look At ESTsoft's Liabilities

Zooming in on the latest balance sheet data, we can see that ESTsoft had liabilities of ₩61.5b due within 12 months and liabilities of ₩18.3b due beyond that. Offsetting these obligations, it had cash of ₩48.5b as well as receivables valued at ₩9.52b due within 12 months. So its liabilities total ₩21.8b more than the combination of its cash and short-term receivables.

ESTsoft has a market capitalization of ₩75.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, ESTsoft also has more cash than debt, so we're pretty confident it can manage its debt safely.

We also note that ESTsoft improved its EBIT from a last year's loss to a positive ₩2.5b. There's no doubt that we learn most about debt from the balance sheet. But it is ESTsoft'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While ESTsoft 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. Happily for any shareholders, ESTsoft actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While ESTsoft does have more liabilities than liquid assets, it also has net cash of ₩15.6b. And it impressed us with free cash flow of ₩6.4b, being 253% of its EBIT. So we are not troubled with ESTsoft'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. To that end, you should learn about the 2 warning signs we've spotted with ESTsoft (including 1 which shouldn't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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