Is SMCore.Inc (KOSDAQ:007820) Using Too Much Debt?

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 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. We can see that SMCore.Inc (KOSDAQ:007820) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SMCore.Inc

What Is SMCore.Inc's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 SMCore.Inc had debt of ₩5.24b, up from ₩3.03b in one year. However, its balance sheet shows it holds ₩33.1b in cash, so it actually has ₩27.8b net cash.

How Healthy Is SMCore.Inc's Balance Sheet?

According to the last reported balance sheet, SMCore.Inc had liabilities of ₩20.2b due within 12 months, and liabilities of ₩2.87b due beyond 12 months. Offsetting these obligations, it had cash of ₩33.1b as well as receivables valued at ₩18.6b due within 12 months. So it can boast ₩28.6b more liquid assets than total liabilities.

This surplus suggests that SMCore.Inc is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, SMCore.Inc boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, SMCore.Inc's EBIT fell a jaw-dropping 60% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SMCore.Inc 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SMCore.Inc 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, SMCore.Inc 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

While it is always sensible to investigate a company's debt, in this case SMCore.Inc has ₩27.8b in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about SMCore.Inc's balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for SMCore.Inc that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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