David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, SONOKONG Co., Ltd. (KOSDAQ:066910) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for SONOKONG
What Is SONOKONG's Debt?
The chart below, which you can click on for greater detail, shows that SONOKONG had ₩8.70b in debt in September 2020; about the same as the year before. On the flip side, it has ₩3.58b in cash leading to net debt of about ₩5.12b.
How Healthy Is SONOKONG's Balance Sheet?
According to the last reported balance sheet, SONOKONG had liabilities of ₩21.4b due within 12 months, and liabilities of ₩2.03b due beyond 12 months. On the other hand, it had cash of ₩3.58b and ₩7.81b worth of receivables due within a year. So it has liabilities totalling ₩12.0b more than its cash and near-term receivables, combined.
SONOKONG has a market capitalization of ₩47.4b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is SONOKONG's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, SONOKONG reported revenue of ₩83b, which is a gain of 12%, 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. To be specific the EBIT loss came in at ₩2.9b. 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. However, it doesn't help that it burned through ₩1.9b of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for SONOKONG (of which 1 is concerning!) you should know about.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
