Is EM-Tech.CO (KOSDAQ:091120) Using Too Much 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.' 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. We note that EM-Tech.CO., LTD. (KOSDAQ:091120) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for EM-Tech.CO

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

As you can see below, at the end of September 2020, EM-Tech.CO had ₩49.8b of debt, up from ₩28.3b a year ago. Click the image for more detail. However, it does have ₩27.5b in cash offsetting this, leading to net debt of about ₩22.3b.

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

According to the last reported balance sheet, EM-Tech.CO had liabilities of ₩61.4b due within 12 months, and liabilities of ₩38.7b due beyond 12 months. Offsetting this, it had ₩27.5b in cash and ₩24.2b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩48.5b.

EM-Tech.CO has a market capitalization of ₩217.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if EM-Tech.CO can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, EM-Tech.CO made a loss at the EBIT level, and saw its revenue drop to ₩243b, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

Not only did EM-Tech.CO's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩16b 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. Another cause for caution is that is bled ₩9.2b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with EM-Tech.CO .

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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