Is SK IE Technology (KRX:361610) Using Too Much Debt?

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 note that SK IE Technology Co., Ltd. (KRX:361610) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 SK IE Technology

What Is SK IE Technology's Debt?

As you can see below, at the end of March 2024, SK IE Technology had ₩1.45t of debt, up from ₩1.07t a year ago. Click the image for more detail. However, because it has a cash reserve of ₩430.3b, its net debt is less, at about ₩1.02t.

How Healthy Is SK IE Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SK IE Technology had liabilities of ₩304.5b due within 12 months and liabilities of ₩1.32t due beyond that. On the other hand, it had cash of ₩430.3b and ₩43.7b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩1.15t.

SK IE Technology has a market capitalization of ₩3.19t, so it could very likely raise cash to ameliorate 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SK IE Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, SK IE Technology made a loss at the EBIT level, and saw its revenue drop to ₩553b, which is a fall of 7.0%. That's not what we would hope to see.

Caveat Emptor

Importantly, SK IE Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩37b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩354b in negative free cash flow over the last twelve months. 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. Be aware that SK IE Technology is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com