Is Amotech (KOSDAQ:052710) Using Too Much 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.' 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, Amotech Co., Ltd. (KOSDAQ:052710) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Amotech

What Is Amotech's Debt?

As you can see below, at the end of September 2020, Amotech had ₩182.5b of debt, up from ₩167.2b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩69.5b, its net debt is less, at about ₩113.0b.

How Healthy Is Amotech's Balance Sheet?

We can see from the most recent balance sheet that Amotech had liabilities of ₩167.0b falling due within a year, and liabilities of ₩84.8b due beyond that. Offsetting this, it had ₩69.5b in cash and ₩43.3b in receivables that were due within 12 months. So it has liabilities totalling ₩139.0b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Amotech is worth ₩372.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 Amotech 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 Amotech had a loss before interest and tax, and actually shrunk its revenue by 15%, to ₩213b. We would much prefer see growth.

Caveat Emptor

Not only did Amotech's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩1.9b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩30b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Amotech 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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