Is Atec T& (KOSDAQ:224110) A Risky Investment?

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.' 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. We note that Atec T& Co., Ltd (KOSDAQ:224110) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Atec T&

What Is Atec T&'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Atec T& had ₩9.50b of debt, an increase on ₩6.90b, over one year. But on the other hand it also has ₩22.8b in cash, leading to a ₩13.3b 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 ₩34.3b due within 12 months and liabilities of ₩4.05b due beyond that. On the other hand, it had cash of ₩22.8b and ₩15.5b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Atec T&'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩99.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Atec T& boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Atec T&'s saving grace is its low debt levels, because its EBIT has tanked 33% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Atec T& 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Atec T& has ₩13.3b in net cash. And it impressed us with free cash flow of ₩1.2b, being 189% of its EBIT. So we are not troubled with Atec T&'s debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Atec T& has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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. 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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