Health Check: How Prudently Does S-Oil (KRX:010950) Use Debt?

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 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 S-Oil Corporation (KRX:010950) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for S-Oil

What Is S-Oil's Net Debt?

You can click the graphic below for the historical numbers, but it shows that S-Oil had ₩7.01t of debt in September 2020, down from ₩7.37t, one year before. However, it does have ₩1.49t in cash offsetting this, leading to net debt of about ₩5.52t.

How Healthy Is S-Oil's Balance Sheet?

We can see from the most recent balance sheet that S-Oil had liabilities of ₩6.40t falling due within a year, and liabilities of ₩4.14t due beyond that. Offsetting these obligations, it had cash of ₩1.49t as well as receivables valued at ₩1.10t due within 12 months. So it has liabilities totalling ₩7.95t more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩8.06t, so it does suggest shareholders should keep an eye on S-Oil's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if S-Oil can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, S-Oil made a loss at the EBIT level, and saw its revenue drop to ₩19t, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

While S-Oil's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩1.2t. 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. We would feel better if it turned its trailing twelve month loss of ₩872b into a profit. So we do think this stock is quite risky. 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 example - S-Oil has 1 warning sign we think 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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