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. As with many other companies SP Systems Co.,Ltd. (KOSDAQ:317830) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 SP SystemsLtd
What Is SP SystemsLtd's Debt?
As you can see below, SP SystemsLtd had ₩14.1b of debt at March 2024, down from ₩15.8b a year prior. However, it does have ₩35.5b in cash offsetting this, leading to net cash of ₩21.4b.
How Healthy Is SP SystemsLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SP SystemsLtd had liabilities of ₩25.6b due within 12 months and liabilities of ₩4.28b due beyond that. Offsetting this, it had ₩35.5b in cash and ₩5.11b in receivables that were due within 12 months. So it can boast ₩10.7b more liquid assets than total liabilities.
It's good to see that SP SystemsLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that SP SystemsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is SP SystemsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, SP SystemsLtd reported revenue of ₩66b, which is a gain of 29%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is SP SystemsLtd?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that SP SystemsLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩2.4b of cash and made a loss of ₩1.3b. With only ₩21.4b on the balance sheet, it would appear that its going to need to raise capital again soon. SP SystemsLtd's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For example, we've discovered 3 warning signs for SP SystemsLtd (1 is a bit concerning!) that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
About KOSDAQ:A317830
Adequate balance sheet very low.
