David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies PPI Inc. (KOSDAQ:062970) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. 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 PPI
How Much Debt Does PPI Carry?
As you can see below, at the end of December 2020, PPI had ₩11.6b of debt, up from ₩8.97b a year ago. Click the image for more detail. However, it does have ₩7.01b in cash offsetting this, leading to net debt of about ₩4.62b.
How Strong Is PPI's Balance Sheet?
We can see from the most recent balance sheet that PPI had liabilities of ₩6.40b falling due within a year, and liabilities of ₩10.5b due beyond that. Offsetting this, it had ₩7.01b in cash and ₩1.49b in receivables that were due within 12 months. So its liabilities total ₩8.43b more than the combination of its cash and short-term receivables.
Of course, PPI has a market capitalization of ₩49.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is PPI's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year PPI had a loss before interest and tax, and actually shrunk its revenue by 55%, to ₩22b. To be frank that doesn't bode well.
Caveat Emptor
While PPI's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩6.5b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩9.2b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for PPI (of which 1 is concerning!) you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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About KOSDAQ:A062970
PPI
Produces and sells optical power splitters and arrayed waveguide gratings for use in high speed and FTTH networks.
Mediocre balance sheet low.
