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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, SDN Company., Ltd. (KOSDAQ:099220) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.
See our latest analysis for SDN Company
What Is SDN Company's Debt?
As you can see below, at the end of March 2024, SDN Company had ₩71.0b of debt, up from ₩60.7b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩7.51b, its net debt is less, at about ₩63.5b.
How Healthy Is SDN Company's Balance Sheet?
We can see from the most recent balance sheet that SDN Company had liabilities of ₩65.2b falling due within a year, and liabilities of ₩25.8b due beyond that. Offsetting this, it had ₩7.51b in cash and ₩42.8b in receivables that were due within 12 months. So it has liabilities totalling ₩40.7b more than its cash and near-term receivables, combined.
SDN Company has a market capitalization of ₩87.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SDN Company will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, SDN Company made a loss at the EBIT level, and saw its revenue drop to ₩78b, which is a fall of 28%. 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. Indeed, it lost a very considerable ₩9.8b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩5.1b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with SDN Company (at least 3 which are a bit concerning) , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
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About KOSDAQ:A099220
Mediocre balance sheet and slightly overvalued.
