Is Sangji Construction (KOSDAQ:042940) Using Too Much Debt?

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 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. Importantly, Sangji Construction, Inc. (KOSDAQ:042940) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sangji Construction

How Much Debt Does Sangji Construction Carry?

As you can see below, Sangji Construction had ₩62.6b of debt at June 2024, down from ₩98.6b a year prior. On the flip side, it has ₩13.0b in cash leading to net debt of about ₩49.6b.

How Strong Is Sangji Construction's Balance Sheet?

According to the last reported balance sheet, Sangji Construction had liabilities of ₩59.4b due within 12 months, and liabilities of ₩22.5b due beyond 12 months. Offsetting this, it had ₩13.0b in cash and ₩28.8b in receivables that were due within 12 months. So its liabilities total ₩40.1b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩22.7b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Sangji Construction would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sangji Construction's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Sangji Construction had a loss before interest and tax, and actually shrunk its revenue by 39%, to ₩85b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Sangji Construction's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩9.8b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩10b in negative free cash flow over the last year. That means it's on the risky side of things. 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. Case in point: We've spotted 4 warning signs for Sangji Construction you should be aware of, and 2 of them are a bit concerning.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.