Is RSUPPORT (KOSDAQ:131370) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 RSUPPORT Co., Ltd. (KOSDAQ:131370) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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

View our latest analysis for RSUPPORT

How Much Debt Does RSUPPORT Carry?

As you can see below, at the end of September 2019, RSUPPORT had ₩9.00b of debt, up from ₩917 a year ago. Click the image for more detail. However, it does have ₩17.8b in cash offsetting this, leading to net cash of ₩8.75b.

How Healthy Is RSUPPORT's Balance Sheet?

We can see from the most recent balance sheet that RSUPPORT had liabilities of ₩5.97b falling due within a year, and liabilities of ₩10.1b due beyond that. Offsetting this, it had ₩17.8b in cash and ₩5.89b in receivables that were due within 12 months. So it can boast ₩7.61b more liquid assets than total liabilities.

This short term liquidity is a sign that RSUPPORT could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that RSUPPORT has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that RSUPPORT has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if RSUPPORT can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While RSUPPORT 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, RSUPPORT saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that RSUPPORT has net cash of ₩8.75b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 34% over the last year. So we don't have any problem with RSUPPORT's use of debt. 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. Take risks, for example - RSUPPORT has 1 warning sign we think you should be aware of.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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