Is ABCO Electronics (KOSDAQ:036010) Using Debt In A Risky Way?

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.' 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 ABCO Electronics Co., Ltd. (KOSDAQ:036010) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ABCO Electronics

What Is ABCO Electronics's Net Debt?

As you can see below, at the end of June 2024, ABCO Electronics had ₩13.0b of debt, up from ₩5.00b a year ago. Click the image for more detail. But it also has ₩40.8b in cash to offset that, meaning it has ₩27.8b net cash.

How Healthy Is ABCO Electronics' Balance Sheet?

The latest balance sheet data shows that ABCO Electronics had liabilities of ₩24.0b due within a year, and liabilities of ₩13.6b falling due after that. Offsetting these obligations, it had cash of ₩40.8b as well as receivables valued at ₩19.6b due within 12 months. So it actually has ₩22.7b more liquid assets than total liabilities.

This excess liquidity is a great indication that ABCO Electronics' balance sheet is almost as strong as Fort Knox. 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. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, ABCO Electronics made a loss at the EBIT level, and saw its revenue drop to ₩120b, which is a fall of 16%. We would much prefer see growth.

So How Risky Is ABCO Electronics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year ABCO Electronics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩3.2b of cash and made a loss of ₩641m. But the saving grace is the ₩27.8b on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. To that end, you should be aware of the 1 warning sign we've spotted with ABCO Electronics .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.