Is Crucialtec (KOSDAQ:114120) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Crucialtec Co., Ltd. (KOSDAQ:114120) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Crucialtec

What Is Crucialtec's Debt?

You can click the graphic below for the historical numbers, but it shows that Crucialtec had ₩11.1b of debt in September 2020, down from ₩48.4b, one year before. 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. On the other hand, it had cash of ₩12.0b and ₩9.12b worth of receivables due within a year. So its liabilities total ₩3.69b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Crucialtec is worth ₩18.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Crucialtec will need earnings to service that debt. 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.

Over 12 months, Crucialtec made a loss at the EBIT level, and saw its revenue drop to ₩52b, which is a fall of 19%. 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 in the last year Crucialtec had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩8.0b of cash and made a loss of ₩43b. Given it only has net cash of ₩864.7m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Crucialtec you should be aware of, and 1 of them makes us a bit uncomfortable.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you decide to trade Crucialtec, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.