Health Check: How Prudently Does SU-HoldingsLtd (KOSDAQ:031860) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies SU-Holdings Co.,Ltd. (KOSDAQ:031860) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for SU-HoldingsLtd

How Much Debt Does SU-HoldingsLtd Carry?

The image below, which you can click on for greater detail, shows that SU-HoldingsLtd had debt of ₩3.18b at the end of September 2023, a reduction from ₩4.05b over a year. But it also has ₩11.7b in cash to offset that, meaning it has ₩8.57b net cash.

A Look At SU-HoldingsLtd's Liabilities

The latest balance sheet data shows that SU-HoldingsLtd had liabilities of ₩6.53b due within a year, and liabilities of ₩851.0m falling due after that. On the other hand, it had cash of ₩11.7b and ₩16.5b worth of receivables due within a year. So it actually has ₩20.8b more liquid assets than total liabilities.

This surplus liquidity suggests that SU-HoldingsLtd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that SU-HoldingsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 SU-HoldingsLtd 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, SU-HoldingsLtd reported revenue of ₩9.1b, which is a gain of 3.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is SU-HoldingsLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year SU-HoldingsLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩9.3b and booked a ₩17b accounting loss. But at least it has ₩8.57b on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 4 warning signs with SU-HoldingsLtd (at least 3 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.