Here's Why PNC Technologies (KOSDAQ:237750) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 PNC Technologies co., Ltd (KOSDAQ:237750) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for PNC Technologies

What Is PNC Technologies's Debt?

The chart below, which you can click on for greater detail, shows that PNC Technologies had ₩2.39b in debt in September 2020; about the same as the year before. But it also has ₩31.9b in cash to offset that, meaning it has ₩29.5b net cash.

How Healthy Is PNC Technologies' Balance Sheet?

According to the last reported balance sheet, PNC Technologies had liabilities of ₩7.11b due within 12 months, and liabilities of ₩1.47b due beyond 12 months. Offsetting this, it had ₩31.9b in cash and ₩2.86b in receivables that were due within 12 months. So it can boast ₩26.2b more liquid assets than total liabilities.

This excess liquidity is a great indication that PNC Technologies' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, PNC Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact PNC Technologies's saving grace is its low debt levels, because its EBIT has tanked 42% 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since PNC Technologies will need earnings to service that debt. 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. While PNC Technologies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, PNC Technologies saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case PNC Technologies has ₩29.5b in net cash and a decent-looking balance sheet. So we don't have any problem with PNC Technologies's use of debt. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with PNC Technologies (at least 1 which is potentially serious) , 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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