Health Check: How Prudently Does ABCO Electronics (KOSDAQ:036010) Use Debt?

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, ABCO Electronics Co., Ltd. (KOSDAQ:036010) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ABCO Electronics

What Is ABCO Electronics's Net Debt?

The image below, which you can click on for greater detail, shows that ABCO Electronics had debt of ₩5.00b at the end of September 2020, a reduction from ₩7.50b over a year. But on the other hand it also has ₩61.5b in cash, leading to a ₩56.5b net cash position.

How Strong Is ABCO Electronics's Balance Sheet?

We can see from the most recent balance sheet that ABCO Electronics had liabilities of ₩27.8b falling due within a year, and liabilities of ₩9.69b due beyond that. Offsetting these obligations, it had cash of ₩61.5b as well as receivables valued at ₩16.8b due within 12 months. So it actually has ₩40.8b more liquid assets than total liabilities.

This excess liquidity is a great indication that ABCO Electronics's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, ABCO Electronics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ABCO Electronics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year ABCO Electronics had a loss before interest and tax, and actually shrunk its revenue by 3.5%, to ₩127b. That's not what we would hope to see.

So How Risky Is ABCO Electronics?

While ABCO Electronics lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩3.1b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 3 warning signs for ABCO Electronics you should be aware of.

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. 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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