Is Sung Kwang BendLtd (KOSDAQ:014620) A Risky Investment?

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.' 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 Sung Kwang Bend Co.,Ltd. (KOSDAQ:014620) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sung Kwang BendLtd

What Is Sung Kwang BendLtd's Debt?

As you can see below, Sung Kwang BendLtd had ₩2.00b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩136.9b in cash to offset that, meaning it has ₩134.9b net cash.

How Healthy Is Sung Kwang BendLtd's Balance Sheet?

We can see from the most recent balance sheet that Sung Kwang BendLtd had liabilities of ₩36.9b falling due within a year, and liabilities of ₩9.37b due beyond that. On the other hand, it had cash of ₩136.9b and ₩41.6b worth of receivables due within a year. So it can boast ₩132.3b more liquid assets than total liabilities.

This excess liquidity is a great indication that Sung Kwang BendLtd's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Sung Kwang BendLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Sung Kwang BendLtd has increased its EBIT by 8.0% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sung Kwang BendLtd'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 company can only pay off debt with cold hard cash, not accounting profits. Sung Kwang BendLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Sung Kwang BendLtd recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sung Kwang BendLtd has ₩134.9b in net cash and a decent-looking balance sheet. So is Sung Kwang BendLtd's debt a risk? It doesn't seem so to us. 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. Be aware that Sung Kwang BendLtd is showing 1 warning sign in our investment analysis , you should know about...

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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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.