Is SDN Company (KOSDAQ:099220) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies SDN Company., Ltd. (KOSDAQ:099220) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 December 2023 SDN Company had debt of ₩74.3b, up from ₩61.5b in one year. However, it also had ₩12.6b in cash, and so its net debt is ₩61.7b.

How Strong Is SDN Company's Balance Sheet?

According to the last reported balance sheet, SDN Company had liabilities of ₩55.0b due within 12 months, and liabilities of ₩38.1b due beyond 12 months. On the other hand, it had cash of ₩12.6b and ₩42.8b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩37.8b.

While this might seem like a lot, it is not so bad since SDN Company has a market capitalization of ₩77.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SDN Company will need earnings to service that debt. 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 SDN Company had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₩76b. That makes us nervous, to say the least.

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 ₩8.6b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩8.1b of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for SDN Company (2 are potentially serious) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.