David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Saehwa IMC Co., Ltd. (KRX:145210) does use debt in its business. But the real question is whether this debt is making the company risky.
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. 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. 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 Saehwa IMC
How Much Debt Does Saehwa IMC Carry?
The image below, which you can click on for greater detail, shows that Saehwa IMC had debt of ₩44.6b at the end of December 2020, a reduction from ₩84.5b over a year. However, because it has a cash reserve of ₩38.6b, its net debt is less, at about ₩6.08b.
How Healthy Is Saehwa IMC's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Saehwa IMC had liabilities of ₩34.0b due within 12 months and liabilities of ₩53.0b due beyond that. On the other hand, it had cash of ₩38.6b and ₩24.1b worth of receivables due within a year. So it has liabilities totalling ₩24.2b more than its cash and near-term receivables, combined.
Saehwa IMC has a market capitalization of ₩102.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Saehwa IMC 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, Saehwa IMC made a loss at the EBIT level, and saw its revenue drop to ₩77b, which is a fall of 23%. That makes us nervous, to say the least.
Caveat Emptor
Not only did Saehwa IMC's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩9.5b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩21b of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Saehwa IMC has 3 warning signs (and 2 which can't be ignored) we think you should know about.
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. 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:A145210
Dynamic Design
Primarily engages in the manufacture and sale of tire molds forming machines in Korea, China, the Americas, Europe, and Indonesia.
Flawless balance sheet low.
