Is SP SystemsLtd (KOSDAQ:317830) A Risky Investment?

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 SP Systems Co.,Ltd. (KOSDAQ:317830) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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 SP SystemsLtd

What Is SP SystemsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 SP SystemsLtd had ₩14.1b of debt, an increase on ₩13.2b, over one year. However, its balance sheet shows it holds ₩32.0b in cash, so it actually has ₩17.9b net cash.

How Healthy Is SP SystemsLtd's Balance Sheet?

According to the last reported balance sheet, SP SystemsLtd had liabilities of ₩25.8b due within 12 months, and liabilities of ₩4.23b due beyond 12 months. Offsetting these obligations, it had cash of ₩32.0b as well as receivables valued at ₩10.5b due within 12 months. So it actually has ₩12.5b more liquid assets than total liabilities.

This short term liquidity is a sign that SP SystemsLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SP SystemsLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SP SystemsLtd will need earnings to service that debt. 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.

Over 12 months, SP SystemsLtd reported revenue of ₩68b, which is a gain of 20%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is SP SystemsLtd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months SP SystemsLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩2.8b of cash and made a loss of ₩3.0b. With only ₩17.9b on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, SP SystemsLtd may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for SP SystemsLtd (2 are potentially serious!) that you should be aware of before investing here.

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. 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.