Here's Why SK Square (KRX:402340) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that SK Square Co., Ltd. (KRX:402340) does use debt in its business. But should shareholders be worried about its use of debt?

We've discovered 1 warning sign about SK Square. View them for free.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is SK Square's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 SK Square had ₩81.9b of debt, an increase on ₩47.7b, over one year. But on the other hand it also has ₩1.57t in cash, leading to a ₩1.49t net cash position.

How Strong Is SK Square's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SK Square had liabilities of ₩1.40t due within 12 months and liabilities of ₩939.3b due beyond that. Offsetting these obligations, it had cash of ₩1.57t as well as receivables valued at ₩1.00t due within 12 months. So it can boast ₩237.2b more liquid assets than total liabilities.

Having regard to SK Square's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩12t company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, SK Square boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for SK Square

Although SK Square made a loss at the EBIT level, last year, it was also good to see that it generated ₩4.0t in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if SK Square can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While SK Square has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, SK Square reported free cash flow worth 3.8% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case SK Square has ₩1.49t in net cash and a decent-looking balance sheet. So we are not troubled with SK Square's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for SK Square that you should be aware of before investing here.

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. 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.