Sungchang Autotech (KOSDAQ:080470) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Sungchang Autotech Co., Ltd. (KOSDAQ:080470) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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.

Check out our latest analysis for Sungchang Autotech

What Is Sungchang Autotech's Net Debt?

As you can see below, at the end of September 2020, Sungchang Autotech had ₩23.9b of debt, up from ₩21.0b a year ago. Click the image for more detail. However, it does have ₩6.56b in cash offsetting this, leading to net debt of about ₩17.4b.

How Strong Is Sungchang Autotech's Balance Sheet?

We can see from the most recent balance sheet that Sungchang Autotech had liabilities of ₩71.0b falling due within a year, and liabilities of ₩14.9b due beyond that. Offsetting these obligations, it had cash of ₩6.56b as well as receivables valued at ₩49.2b due within 12 months. So it has liabilities totalling ₩30.1b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Sungchang Autotech is worth ₩64.5b, 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sungchang Autotech 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.

In the last year Sungchang Autotech had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₩123b. We would much prefer see growth.

Caveat Emptor

While Sungchang Autotech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩1.4b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of ₩1.8b and a profit of ₩131m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Sungchang Autotech (including 1 which shouldn't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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