Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies SBW, Inc. (KRX:102280) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 SBW
How Much Debt Does SBW Carry?
You can click the graphic below for the historical numbers, but it shows that SBW had ₩31.7b of debt in September 2020, down from ₩42.2b, one year before. But on the other hand it also has ₩46.6b in cash, leading to a ₩14.9b net cash position.
How Healthy Is SBW's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SBW had liabilities of ₩126.4b due within 12 months and liabilities of ₩30.0b due beyond that. Offsetting this, it had ₩46.6b in cash and ₩24.1b in receivables that were due within 12 months. So it has liabilities totalling ₩85.7b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since SBW has a market capitalization of ₩145.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, SBW 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 SBW'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.
Over 12 months, SBW saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
So How Risky Is SBW?
Although SBW had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩6.8b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for SBW that you should be aware of.
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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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:A102280
SBW
SBW, Inc. manufactures, distributes, and sells underwear in South Korea.
Excellent balance sheet and overvalued.
