Is ABCO Electronics (KOSDAQ:036010) Weighed On By Its Debt Load?

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. We note that ABCO Electronics Co., Ltd. (KOSDAQ:036010) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 March 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 ₩41.0b in cash to offset that, meaning it has ₩28.0b net cash.

A Look At ABCO Electronics' Liabilities

Zooming in on the latest balance sheet data, we can see that ABCO Electronics had liabilities of ₩23.5b due within 12 months and liabilities of ₩13.5b due beyond that. Offsetting this, it had ₩41.0b in cash and ₩17.5b in receivables that were due within 12 months. So it can boast ₩21.5b more liquid assets than total liabilities.

This excess liquidity suggests that ABCO Electronics is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. 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 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 23%. To be frank that doesn't bode well.

So How Risky Is ABCO Electronics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ABCO Electronics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩5.3b and booked a ₩2.9b accounting loss. With only ₩28.0b on the balance sheet, it would appear that its going to need to raise capital again soon. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with ABCO Electronics , and understanding them should be part of your investment process.

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