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.' 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, Sy Co., Ltd. (KOSDAQ:109610) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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?
You can click the graphic below for the historical numbers, but it shows that Sy had ₩117.9b of debt in December 2020, down from ₩148.0b, one year before. On the flip side, it has ₩40.0b in cash leading to net debt of about ₩77.9b.
How Strong Is Sy's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sy had liabilities of ₩137.5b due within 12 months and liabilities of ₩52.4b due beyond that. Offsetting these obligations, it had cash of ₩40.0b as well as receivables valued at ₩69.9b due within 12 months. So its liabilities total ₩80.0b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Sy is worth ₩171.9b, and thus could probably raise enough capital to shore up 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 18%, to ₩310b. 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 ₩12b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩420m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Sy you should know about.
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. 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.
