Health Check: How Prudently Does NewFlex Technology (KOSDAQ:085670) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies NewFlex Technology Co., Ltd. (KOSDAQ:085670) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for NewFlex Technology

What Is NewFlex Technology's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 NewFlex Technology had debt of ₩69.7b, up from ₩61.0b in one year. However, it also had ₩6.71b in cash, and so its net debt is ₩63.0b.

A Look At NewFlex Technology's Liabilities

The latest balance sheet data shows that NewFlex Technology had liabilities of ₩81.7b due within a year, and liabilities of ₩14.1b falling due after that. On the other hand, it had cash of ₩6.71b and ₩25.8b worth of receivables due within a year. So it has liabilities totalling ₩63.3b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩42.1b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, NewFlex Technology would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since NewFlex Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year NewFlex Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to ₩149b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, NewFlex Technology had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩9.8b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩8.9b in negative free cash flow over the last year. That means it's on the risky side of things. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for NewFlex Technology (of which 2 can't be ignored!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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