The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Sy Co., Ltd. (KOSDAQ:109610) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Sy
How Much Debt Does Sy Carry?
The image below, which you can click on for greater detail, shows that at September 2020 Sy had debt of ₩156.8b, up from ₩144.8b in one year. However, because it has a cash reserve of ₩21.2b, its net debt is less, at about ₩135.6b.
A Look At Sy's Liabilities
The latest balance sheet data shows that Sy had liabilities of ₩166.1b due within a year, and liabilities of ₩56.1b falling due after that. On the other hand, it had cash of ₩21.2b and ₩71.8b worth of receivables due within a year. So its liabilities total ₩129.1b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of ₩192.8b, so it does suggest shareholders should keep an eye on Sy's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Sy'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 Sy had a loss before interest and tax, and actually shrunk its revenue by 19%, to ₩322b. We would much prefer see growth.
Caveat Emptor
Not only did Sy's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩7.0b. 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 ₩10b of cash over the last year. So in short it's a really risky stock. 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 Sy you should be aware of, and 3 of them don't sit too well with us.
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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About KOSDAQ:A109610
Sy
Engages in the production and sale of architectural materials for buildings in South Korea.
Mediocre balance sheet and slightly overvalued.
