We Think Satrec Initiative (KOSDAQ:099320) Can Manage Its Debt With Ease

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.' 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. We note that Satrec Initiative Co., Ltd. (KOSDAQ:099320) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Satrec Initiative

How Much Debt Does Satrec Initiative Carry?

As you can see below, at the end of September 2020, Satrec Initiative had ₩1.85b of debt, up from ₩200.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩28.5b in cash, so it actually has ₩26.6b net cash.

How Strong Is Satrec Initiative's Balance Sheet?

According to the last reported balance sheet, Satrec Initiative had liabilities of ₩26.8b due within 12 months, and liabilities of ₩5.62b due beyond 12 months. Offsetting these obligations, it had cash of ₩28.5b as well as receivables valued at ₩2.37b due within 12 months. So its liabilities total ₩1.60b more than the combination of its cash and short-term receivables.

This state of affairs indicates that Satrec Initiative's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩213.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Satrec Initiative boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Satrec Initiative grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Satrec Initiative can strengthen its balance sheet over time. 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. Satrec Initiative 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. Happily for any shareholders, Satrec Initiative actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Satrec Initiative has ₩26.6b in net cash. And it impressed us with free cash flow of ₩7.8b, being 101% of its EBIT. So we don't think Satrec Initiative's use of debt is risky. 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 1 warning sign for Satrec Initiative 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. 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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