Sung Kwang BendLtd (KOSDAQ:014620) Seems To Use Debt Quite Sensibly

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.' 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. As with many other companies Sung Kwang Bend Co.,Ltd. (KOSDAQ:014620) makes use of debt. But should shareholders be worried about its use of debt?

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

See our latest analysis for Sung Kwang BendLtd

What Is Sung Kwang BendLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Sung Kwang BendLtd had ₩20.0b of debt in September 2020, down from ₩23.7b, one year before. But on the other hand it also has ₩38.4b in cash, leading to a ₩18.4b net cash position.

How Strong Is Sung Kwang BendLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sung Kwang BendLtd had liabilities of ₩20.4b due within 12 months and liabilities of ₩41.5b due beyond that. Offsetting these obligations, it had cash of ₩38.4b as well as receivables valued at ₩43.9b due within 12 months. So it actually has ₩20.4b more liquid assets than total liabilities.

This surplus suggests that Sung Kwang BendLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sung Kwang BendLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Sung Kwang BendLtd made a loss at the EBIT level, last year, it was also good to see that it generated ₩5.6b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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. During the last year, Sung Kwang BendLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sung Kwang BendLtd has net cash of ₩18.4b, as well as more liquid assets than liabilities. So we don't have any problem with Sung Kwang BendLtd'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. Case in point: We've spotted 1 warning sign for Sung Kwang BendLtd you should be aware of.

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. 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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