We Think MDS Tech (KOSDAQ:086960) Can Stay On Top Of Its Debt

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 MDS Tech Inc. (KOSDAQ:086960) makes use of debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

How Much Debt Does MDS Tech Carry?

As you can see below, at the end of March 2025, MDS Tech had ₩38.7b of debt, up from ₩7.03b a year ago. Click the image for more detail. But it also has ₩100.0b in cash to offset that, meaning it has ₩61.4b net cash.

How Strong Is MDS Tech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MDS Tech had liabilities of ₩85.9b due within 12 months and liabilities of ₩5.70b due beyond that. Offsetting this, it had ₩100.0b in cash and ₩28.0b in receivables that were due within 12 months. So it actually has ₩36.5b more liquid assets than total liabilities.

This excess liquidity suggests that MDS Tech is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that MDS Tech has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for MDS Tech

The modesty of its debt load may become crucial for MDS Tech if management cannot prevent a repeat of the 43% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MDS Tech's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While MDS Tech 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, MDS Tech actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that MDS Tech has net cash of ₩61.4b, as well as more liquid assets than liabilities. The cherry on top was that in converted 146% of that EBIT to free cash flow, bringing in ₩8.5b. So we don't think MDS Tech's use of debt is risky. 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. For example, we've discovered 3 warning signs for MDS Tech that you should be aware of before investing here.

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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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.