Health Check: How Prudently Does Alticast (KOSDAQ:085810) Use Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Alticast Corporation (KOSDAQ:085810) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Alticast

What Is Alticast's Debt?

As you can see below, at the end of September 2020, Alticast had ₩10.4b of debt, up from ₩1.11b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩13.6b in cash, so it actually has ₩3.23b net cash.

How Strong Is Alticast's Balance Sheet?

According to the last reported balance sheet, Alticast had liabilities of ₩18.0b due within 12 months, and liabilities of ₩22.9b due beyond 12 months. Offsetting these obligations, it had cash of ₩13.6b as well as receivables valued at ₩12.7b due within 12 months. So it has liabilities totalling ₩14.5b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Alticast has a market capitalization of ₩50.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Alticast also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Alticast'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.

In the last year Alticast wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to ₩54b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Alticast?

Although Alticast had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩2.5b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 4 warning signs with Alticast (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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. 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.
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