Is OPASNET (KOSDAQ:173130) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that OPASNET co., Ltd. (KOSDAQ:173130) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for OPASNET

What Is OPASNET's Net Debt?

As you can see below, OPASNET had ₩4.68b of debt at September 2020, down from ₩10.6b a year prior. But on the other hand it also has ₩9.86b in cash, leading to a ₩5.18b net cash position.

How Healthy Is OPASNET's Balance Sheet?

We can see from the most recent balance sheet that OPASNET had liabilities of ₩18.2b falling due within a year, and liabilities of ₩7.83b due beyond that. On the other hand, it had cash of ₩9.86b and ₩10.8b worth of receivables due within a year. So it has liabilities totalling ₩5.39b more than its cash and near-term receivables, combined.

Since publicly traded OPASNET shares are worth a total of ₩49.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, OPASNET boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that OPASNET has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since OPASNET will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. OPASNET may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, OPASNET saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

Although OPASNET's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩5.18b. And we liked the look of last year's 58% year-on-year EBIT growth. So we are not troubled with OPASNET's debt use. 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 2 warning signs for OPASNET that you should be aware of before investing here.

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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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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