These 4 Measures Indicate That Comtec SystemsLtd (KRX:031820) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Comtec Systems Co.,Ltd. (KRX:031820) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Comtec SystemsLtd

How Much Debt Does Comtec SystemsLtd Carry?

As you can see below, at the end of December 2020, Comtec SystemsLtd had ₩18.7b of debt, up from ₩1.00b a year ago. Click the image for more detail. But on the other hand it also has ₩47.8b in cash, leading to a ₩29.2b net cash position.

How Strong Is Comtec SystemsLtd's Balance Sheet?

We can see from the most recent balance sheet that Comtec SystemsLtd had liabilities of ₩76.4b falling due within a year, and liabilities of ₩9.68b due beyond that. On the other hand, it had cash of ₩47.8b and ₩65.7b worth of receivables due within a year. So it actually has ₩27.4b more liquid assets than total liabilities.

This luscious liquidity implies that Comtec SystemsLtd's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Comtec SystemsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Comtec SystemsLtd's saving grace is its low debt levels, because its EBIT has tanked 47% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Comtec SystemsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Comtec SystemsLtd 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 two years, Comtec SystemsLtd 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 it is always sensible to investigate a company's debt, in this case Comtec SystemsLtd has ₩29.2b in net cash and a decent-looking balance sheet. So we don't have any problem with Comtec SystemsLtd'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. Case in point: We've spotted 3 warning signs for Comtec SystemsLtd you should be aware of, and 1 of them shouldn't be ignored.

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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