Is Crucialtec (KOSDAQ:114120) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Crucialtec Co., Ltd. (KOSDAQ:114120) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Crucialtec

How Much Debt Does Crucialtec Carry?

As you can see below, Crucialtec had ₩11.1b of debt at September 2020, down from ₩48.4b a year prior. However, it does have ₩12.0b in cash offsetting this, leading to net cash of ₩864.7m.

How Healthy Is Crucialtec's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Crucialtec had liabilities of ₩19.4b due within 12 months and liabilities of ₩5.43b due beyond that. Offsetting these obligations, it had cash of ₩12.0b as well as receivables valued at ₩9.12b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩3.69b.

Of course, Crucialtec has a market capitalization of ₩20.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Crucialtec also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Crucialtec'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.

In the last year Crucialtec had a loss before interest and tax, and actually shrunk its revenue by 19%, to ₩52b. That's not what we would hope to see.

So How Risky Is Crucialtec?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Crucialtec lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩8.0b and booked a ₩43b accounting loss. With only ₩864.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 4 warning signs for Crucialtec you should be aware of, and 2 of them make us uncomfortable.

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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