Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, SG Corporation (KRX:004060) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for SG
What Is SG's Net Debt?
The image below, which you can click on for greater detail, shows that SG had debt of ₩37.5b at the end of December 2020, a reduction from ₩39.8b over a year. However, its balance sheet shows it holds ₩44.0b in cash, so it actually has ₩6.46b net cash.
How Strong Is SG's Balance Sheet?
We can see from the most recent balance sheet that SG had liabilities of ₩68.3b falling due within a year, and liabilities of ₩2.64b due beyond that. Offsetting these obligations, it had cash of ₩44.0b as well as receivables valued at ₩17.6b due within 12 months. So it has liabilities totalling ₩9.44b more than its cash and near-term receivables, combined.
Given SG has a market capitalization of ₩119.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, SG boasts net cash, so it's fair to say it does not have a heavy debt load! 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 32%, to ₩168b. That makes us nervous, to say the least.
So How Risky Is SG?
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 SG had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩9.1b of cash and made a loss of ₩14b. With only ₩6.46b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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About KOSE:A004060
SG
A fashion company, produces and sells woven garments primarily in South Korea.
Adequate balance sheet with acceptable track record.