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. We note that SDN Company., Ltd. (KOSDAQ:099220) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for SDN Company
What Is SDN Company's Debt?
The image below, which you can click on for greater detail, shows that at June 2024 SDN Company had debt of ₩67.4b, up from ₩61.2b in one year. However, because it has a cash reserve of ₩6.62b, its net debt is less, at about ₩60.7b.
How Strong Is SDN Company's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SDN Company had liabilities of ₩70.4b due within 12 months and liabilities of ₩23.7b due beyond that. On the other hand, it had cash of ₩6.62b and ₩35.0b worth of receivables due within a year. So it has liabilities totalling ₩52.5b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of ₩58.8b, so it does suggest shareholders should keep an eye on SDN Company's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SDN Company's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year SDN Company had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₩80b. To be frank that doesn't bode well.
Caveat Emptor
While SDN Company's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩13b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩18b. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for SDN Company (of which 1 is a bit concerning!) 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.
About KOSDAQ:A099220
Mediocre balance sheet and slightly overvalued.
