ATEC MOBILITY (KOSDAQ:224110) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that ATEC MOBILITY Co., Ltd (KOSDAQ:224110) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ATEC MOBILITY

What Is ATEC MOBILITY's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 ATEC MOBILITY had debt of ₩20.5b, up from ₩19.1b in one year. But it also has ₩54.2b in cash to offset that, meaning it has ₩33.7b net cash.

How Healthy Is ATEC MOBILITY's Balance Sheet?

We can see from the most recent balance sheet that ATEC MOBILITY had liabilities of ₩47.9b falling due within a year, and liabilities of ₩11.9b due beyond that. Offsetting these obligations, it had cash of ₩54.2b as well as receivables valued at ₩21.6b due within 12 months. So it can boast ₩16.0b more liquid assets than total liabilities.

This surplus suggests that ATEC MOBILITY is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that ATEC MOBILITY has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that ATEC MOBILITY grew its EBIT by 408% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is ATEC MOBILITY'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. ATEC MOBILITY may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, ATEC MOBILITY actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that ATEC MOBILITY has net cash of ₩33.7b, as well as more liquid assets than liabilities. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in -₩3.5b. When it comes to ATEC MOBILITY's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. For example, we've discovered 2 warning signs for ATEC MOBILITY (1 is a bit concerning!) that you should be aware of before investing here.

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.

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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.