We Think OPASNET (KOSDAQ:173130) Can Stay On Top Of Its Debt

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 OPASNET co., Ltd. (KOSDAQ:173130) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 OPASNET

What Is OPASNET's Net Debt?

The image below, which you can click on for greater detail, shows that OPASNET had debt of ₩29.1b at the end of March 2024, a reduction from ₩34.9b over a year. But it also has ₩30.4b in cash to offset that, meaning it has ₩1.27b net cash.

A Look At OPASNET's Liabilities

We can see from the most recent balance sheet that OPASNET had liabilities of ₩61.5b falling due within a year, and liabilities of ₩11.2b due beyond that. Offsetting these obligations, it had cash of ₩30.4b as well as receivables valued at ₩19.3b due within 12 months. So its liabilities total ₩22.9b more than the combination of its cash and short-term receivables.

Of course, OPASNET has a market capitalization of ₩120.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, OPASNET also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that OPASNET grew its EBIT at 14% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is OPASNET'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 OPASNET 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. During the last three years, OPASNET burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far 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 ₩1.27b. And it also grew its EBIT by 14% over the last year. So we are not troubled with OPASNET's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for OPASNET 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com