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.' 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. We note that SP Systems Co.,Ltd. (KOSDAQ:317830) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for SP SystemsLtd
What Is SP SystemsLtd's Debt?
As you can see below, SP SystemsLtd had ₩13.2b of debt at December 2023, down from ₩15.8b a year prior. But it also has ₩31.5b in cash to offset that, meaning it has ₩18.3b net cash.
A Look At SP SystemsLtd's Liabilities
We can see from the most recent balance sheet that SP SystemsLtd had liabilities of ₩27.1b falling due within a year, and liabilities of ₩4.85b due beyond that. Offsetting this, it had ₩31.5b in cash and ₩13.7b in receivables that were due within 12 months. So it actually has ₩13.3b 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. Simply put, the fact that SP SystemsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SP SystemsLtd will need earnings to service that debt. 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 ₩60b, which is a gain of 14%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
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. And over the same period it saw negative free cash outflow of ₩7.1b and booked a ₩806m accounting loss. With only ₩18.3b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 3 warning signs with SP SystemsLtd (at least 1 which is potentially serious) , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
