Ace Technologies (KOSDAQ:088800) Is Carrying A Fair Bit 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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Ace Technologies Corp. (KOSDAQ:088800) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Ace Technologies

What Is Ace Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Ace Technologies had ₩191.2b of debt, an increase on ₩178.1b, over one year. However, because it has a cash reserve of ₩35.9b, its net debt is less, at about ₩155.3b.

How Strong Is Ace Technologies' Balance Sheet?

We can see from the most recent balance sheet that Ace Technologies had liabilities of ₩180.9b falling due within a year, and liabilities of ₩100.5b due beyond that. Offsetting this, it had ₩35.9b in cash and ₩63.5b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩182.0b.

While this might seem like a lot, it is not so bad since Ace Technologies has a market capitalization of ₩784.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ace Technologies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Ace Technologies had a loss before interest and tax, and actually shrunk its revenue by 44%, to ₩211b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Ace Technologies's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩62b at the EBIT level. 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. However, it doesn't help that it burned through ₩62b of cash over the last year. 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. To that end, you should be aware of the 3 warning signs we've spotted with Ace Technologies .

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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