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 Aroot Co., Ltd. (KOSDAQ:096690) makes use of debt. But is this debt a concern to shareholders?
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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Aroot
How Much Debt Does Aroot Carry?
You can click the graphic below for the historical numbers, but it shows that Aroot had ₩14.6b of debt in September 2020, down from ₩20.6b, one year before. However, because it has a cash reserve of ₩14.0b, its net debt is less, at about ₩594.3m.
How Strong Is Aroot's Balance Sheet?
According to the last reported balance sheet, Aroot had liabilities of ₩38.8b due within 12 months, and liabilities of ₩980.9m due beyond 12 months. Offsetting this, it had ₩14.0b in cash and ₩10.5b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩15.3b.
Given Aroot has a market capitalization of ₩79.0b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Aroot has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is Aroot'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 Aroot wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to ₩36b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Aroot managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₩2.4b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₩1.5b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. We've identified 3 warning signs with Aroot (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.
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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This article by Simply Wall St is general in nature. 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.
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About KOSDAQ:A096690
Adequate balance sheet slight.
