Does Silla Sg (KOSDAQ:025870) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Silla Sg Co., Ltd. (KOSDAQ:025870) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Silla Sg

What Is Silla Sg's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Silla Sg had ₩20.2b of debt in September 2020, down from ₩23.6b, one year before. On the flip side, it has ₩3.62b in cash leading to net debt of about ₩16.6b.

How Healthy Is Silla Sg's Balance Sheet?

We can see from the most recent balance sheet that Silla Sg had liabilities of ₩14.0b falling due within a year, and liabilities of ₩16.8b due beyond that. On the other hand, it had cash of ₩3.62b and ₩3.85b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩23.3b.

While this might seem like a lot, it is not so bad since Silla Sg has a market capitalization of ₩59.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Silla Sg will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Silla Sg made a loss at the EBIT level, and saw its revenue drop to ₩71b, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Silla Sg's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩1.4b. 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. For example, we would not want to see a repeat of last year's loss of ₩1.6b. So in short it's a really risky stock. 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 - Silla Sg has 2 warning signs 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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