Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, SC Engineering Co., Ltd (KRX:023960) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for SC Engineering
What Is SC Engineering's Net Debt?
As you can see below, at the end of March 2024, SC Engineering had ₩17.5b of debt, up from ₩15.4b a year ago. Click the image for more detail. However, it does have ₩14.3b in cash offsetting this, leading to net debt of about ₩3.14b.
How Strong Is SC Engineering's Balance Sheet?
We can see from the most recent balance sheet that SC Engineering had liabilities of ₩51.4b falling due within a year, and liabilities of ₩11.8b due beyond that. Offsetting these obligations, it had cash of ₩14.3b as well as receivables valued at ₩33.0b due within 12 months. So its liabilities total ₩15.9b more than the combination of its cash and short-term receivables.
This deficit isn't so bad because SC Engineering is worth ₩56.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SC Engineering 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.
In the last year SC Engineering had a loss before interest and tax, and actually shrunk its revenue by 10%, to ₩126b. That's not what we would hope to see.
Caveat Emptor
While SC Engineering's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩1.1b at the EBIT level. 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 ₩3.2b of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with SC Engineering .
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.
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About KOSE:A023960
SC Engineering
Operates as an engineering company in South Korea and internationally.
Flawless balance sheet and slightly overvalued.
