We Think Amotech (KOSDAQ:052710) Has A Fair Chunk Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Amotech Co., Ltd. (KOSDAQ:052710) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Amotech

How Much Debt Does Amotech Carry?

As you can see below, at the end of December 2020, Amotech had ₩177.1b of debt, up from ₩168.9b a year ago. Click the image for more detail. On the flip side, it has ₩67.9b in cash leading to net debt of about ₩109.3b.

How Healthy Is Amotech's Balance Sheet?

We can see from the most recent balance sheet that Amotech had liabilities of ₩176.2b falling due within a year, and liabilities of ₩76.0b due beyond that. Offsetting these obligations, it had cash of ₩67.9b as well as receivables valued at ₩41.9b due within 12 months. So its liabilities total ₩142.4b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Amotech is worth ₩295.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 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 9.9%, to ₩224b. That's not what we would hope to see.

Caveat Emptor

Importantly, Amotech had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩4.9b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 ₩17b in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Amotech (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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. 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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