SNT Energy (KRX:100840) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that SNT Energy Co., Ltd. (KRX:100840) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SNT Energy

How Much Debt Does SNT Energy Carry?

You can click the graphic below for the historical numbers, but it shows that SNT Energy had ₩20.0b of debt in December 2023, down from ₩50.0b, one year before. However, its balance sheet shows it holds ₩70.4b in cash, so it actually has ₩50.4b net cash.

A Look At SNT Energy's Liabilities

We can see from the most recent balance sheet that SNT Energy had liabilities of ₩126.6b falling due within a year, and liabilities of ₩20.6b due beyond that. Offsetting this, it had ₩70.4b in cash and ₩37.4b in receivables that were due within 12 months. So its liabilities total ₩39.3b more than the combination of its cash and short-term receivables.

Since publicly traded SNT Energy shares are worth a total of ₩218.4b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SNT Energy boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that SNT Energy grew its EBIT by 415% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is SNT Energy'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SNT Energy may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, SNT Energy actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although SNT Energy's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩50.4b. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in ₩1.1b. So we don't think SNT Energy's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for SNT Energy that you should be aware of before investing here.

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. 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.