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 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, SBW, Inc. (KRX:102280) 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for SBW
How Much Debt Does SBW Carry?
As you can see below, SBW had ₩25.4b of debt at December 2020, down from ₩45.2b a year prior. But on the other hand it also has ₩38.2b in cash, leading to a ₩12.9b net cash position.
How Strong Is SBW's Balance Sheet?
According to the last reported balance sheet, SBW had liabilities of ₩105.5b due within 12 months, and liabilities of ₩29.7b due beyond 12 months. On the other hand, it had cash of ₩38.2b and ₩21.3b worth of receivables due within a year. So its liabilities total ₩75.5b more than the combination of its cash and short-term receivables.
SBW has a market capitalization of ₩151.7b, 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. While it does have liabilities worth noting, SBW also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is SBW'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, 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 ₩7.6b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For instance, we've identified 2 warning signs for SBW that you should be aware of.
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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About KOSE:A102280
SBW
SBW, Inc. manufactures, distributes, and sells underwear in South Korea.
Excellent balance sheet and overvalued.
