Atec T& (KOSDAQ:224110) Seems To Use Debt Rather Sparingly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Atec T& Co., Ltd (KOSDAQ:224110) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Atec T&

How Much Debt Does Atec T& Carry?

As you can see below, Atec T& had ₩6.00b of debt at September 2020, down from ₩7.50b a year prior. But on the other hand it also has ₩21.1b in cash, leading to a ₩15.1b net cash position.

How Healthy Is Atec T&'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Atec T& had liabilities of ₩27.3b due within 12 months and liabilities of ₩3.54b due beyond that. On the other hand, it had cash of ₩21.1b and ₩13.7b worth of receivables due within a year. So it actually has ₩3.99b more liquid assets than total liabilities.

This surplus suggests that Atec T& has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Atec T& boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Atec T& grew its EBIT by 18% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Atec T&'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Atec T& 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. Over the last three years, Atec T& actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Atec T& has ₩15.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 226% of that EBIT to free cash flow, bringing in ₩8.7b. So we don't think Atec T&'s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Atec T& (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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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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