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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, ABCO Electronics Co., Ltd. (KOSDAQ:036010) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ABCO Electronics

What Is ABCO Electronics's Net Debt?

As you can see below, ABCO Electronics had ₩2.02b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩50.2b in cash, leading to a ₩48.2b net cash position.

How Healthy Is ABCO Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ABCO Electronics had liabilities of ₩14.0b due within 12 months and liabilities of ₩8.13b due beyond that. On the other hand, it had cash of ₩50.2b and ₩14.2b worth of receivables due within a year. So it can boast ₩42.2b more liquid assets than total liabilities.

This luscious liquidity implies that ABCO Electronics' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that ABCO Electronics has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine ABCO Electronics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year ABCO Electronics's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

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 ₩2.9b. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for ABCO Electronics you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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