Here's Why EM-Tech.CO (KOSDAQ:091120) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies EM-Tech.CO., LTD. (KOSDAQ:091120) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for EM-Tech.CO

What Is EM-Tech.CO's Net Debt?

As you can see below, EM-Tech.CO had ₩117.5b of debt at September 2024, down from ₩124.0b a year prior. On the flip side, it has ₩88.7b in cash leading to net debt of about ₩28.8b.

How Healthy Is EM-Tech.CO's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EM-Tech.CO had liabilities of ₩43.4b due within 12 months and liabilities of ₩94.7b due beyond that. Offsetting these obligations, it had cash of ₩88.7b as well as receivables valued at ₩48.9b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that EM-Tech.CO's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩378.1b company is short on cash, but still worth keeping an eye on the balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. But it is EM-Tech.CO's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, EM-Tech.CO made a loss at the EBIT level, and saw its revenue drop to ₩204b, which is a fall of 24%. To be frank that doesn't bode well.

Caveat Emptor

While EM-Tech.CO's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩21b 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. For example, we would not want to see a repeat of last year's loss of ₩19b. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for EM-Tech.CO you should be aware of, and 1 of them shouldn't be ignored.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.