David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, SL Corporation (KRX:005850) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for SL
How Much Debt Does SL Carry?
The image below, which you can click on for greater detail, shows that at March 2024 SL had debt of ₩362.7b, up from none in one year. But it also has ₩575.8b in cash to offset that, meaning it has ₩213.1b net cash.
A Look At SL's Liabilities
According to the last reported balance sheet, SL had liabilities of ₩1.20t due within 12 months, and liabilities of ₩122.0b due beyond 12 months. Offsetting these obligations, it had cash of ₩575.8b as well as receivables valued at ₩968.5b due within 12 months. So it actually has ₩220.2b more liquid assets than total liabilities.
This short term liquidity is a sign that SL could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SL boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, SL grew its EBIT by 61% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SL's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SL 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. In the last three years, SL's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While it is always sensible to investigate a company's debt, in this case SL has ₩213.1b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 61% over the last year. So we don't think SL's use of debt is risky. 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. Be aware that SL is showing 1 warning sign in our investment analysis , you should know about...
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. 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.
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About KOSE:A005850
SL
Manufactures and sells automotive parts in South Korea, North America, China, India, Europe, South America, and internationally.
Very undervalued with flawless balance sheet.
