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. Importantly, SONOKONG Co., Ltd. (KOSDAQ:066910) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
See our latest analysis for SONOKONG
How Much Debt Does SONOKONG Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 SONOKONG had ₩11.3b of debt, an increase on ₩10.7b, over one year. However, it also had ₩3.62b in cash, and so its net debt is ₩7.67b.
How Strong Is SONOKONG's Balance Sheet?
The latest balance sheet data shows that SONOKONG had liabilities of ₩28.8b due within a year, and liabilities of ₩1.96b falling due after that. On the other hand, it had cash of ₩3.62b and ₩13.6b worth of receivables due within a year. So its liabilities total ₩13.6b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since SONOKONG has a market capitalization of ₩58.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SONOKONG 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, SONOKONG reported revenue of ₩85b, which is a gain of 16%, 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.
Caveat Emptor
Importantly, SONOKONG had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩1.4b at the EBIT level. 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. 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 ₩1.4b of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Case in point: We've spotted 3 warning signs for SONOKONG you should be aware of, and 1 of them is significant.
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. 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 KOSDAQ:A066910
Excellent balance sheet very low.
