These 4 Measures Indicate That SL (KRX:005850) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that SL Corporation (KRX:005850) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SL

What Is SL's Debt?

As you can see below, at the end of September 2020, SL had ₩329.8b of debt, up from ₩277.4b a year ago. Click the image for more detail. However, it does have ₩335.6b in cash offsetting this, leading to net cash of ₩5.84b.

A Look At SL's Liabilities

Zooming in on the latest balance sheet data, we can see that SL had liabilities of ₩812.1b due within 12 months and liabilities of ₩173.1b due beyond that. Offsetting these obligations, it had cash of ₩335.6b as well as receivables valued at ₩607.9b due within 12 months. So it has liabilities totalling ₩41.6b more than its cash and near-term receivables, combined.

Given SL has a market capitalization of ₩1.08t, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, SL also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, SL grew its EBIT by 411% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, SL burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

We could understand if investors are concerned about SL's liabilities, but we can be reassured by the fact it has has net cash of ₩5.84b. And we liked the look of last year's 411% year-on-year EBIT growth. So we don't have any problem with SL's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - SL has 2 warning signs we think you should be aware of.

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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