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. As with many other companies SG Corporation (KRX:004060) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for SG
How Much Debt Does SG Carry?
As you can see below, SG had ₩42.0b of debt at September 2020, down from ₩57.5b a year prior. However, because it has a cash reserve of ₩25.6b, its net debt is less, at about ₩16.4b.
A Look At SG's Liabilities
Zooming in on the latest balance sheet data, we can see that SG had liabilities of ₩68.1b due within 12 months and liabilities of ₩4.38b due beyond that. Offsetting this, it had ₩25.6b in cash and ₩32.7b in receivables that were due within 12 months. So it has liabilities totalling ₩14.2b more than its cash and near-term receivables, combined.
Since publicly traded SG shares are worth a total of ₩122.5b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is SG's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year SG had a loss before interest and tax, and actually shrunk its revenue by 34%, to ₩213b. That makes us nervous, to say the least.
Caveat Emptor
Not only did SG's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩23b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₩9.6b of cash over the last year. So suffice it to say we consider the stock very risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how SG's profit, revenue, and operating cashflow have changed over the last few years.
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. 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 KOSE:A004060
SG
A fashion company, produces and sells woven garments primarily in South Korea.
Adequate balance sheet low.
