These 4 Measures Indicate That SK Square (KRX:402340) Is Using Debt Reasonably Well

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 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. As with many other companies SK Square Co., Ltd. (KRX:402340) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is SK Square's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SK Square had ₩13.4b of debt in June 2025, down from ₩48.1b, one year before. However, its balance sheet shows it holds ₩2.15t in cash, so it actually has ₩2.14t net cash.

How Strong Is SK Square's Balance Sheet?

According to the last reported balance sheet, SK Square had liabilities of ₩1.13t due within 12 months, and liabilities of ₩1.07t due beyond 12 months. Offsetting these obligations, it had cash of ₩2.15t as well as receivables valued at ₩376.0b due within 12 months. So it actually has ₩331.4b 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 ₩20t 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!

See our latest analysis for SK Square

Better yet, SK Square grew its EBIT by 317% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SK Square's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SK Square 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 two years, SK Square reported free cash flow worth 7.0% 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 we empathize with investors who find debt concerning, you should keep in mind that SK Square has net cash of ₩2.14t, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 317% over the last year. So we don't think SK Square's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example SK Square has 2 warning signs (and 1 which is concerning) 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. 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.