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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Silla Sg Co., Ltd. (KOSDAQ:025870) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Silla Sg
What Is Silla Sg's Debt?
The image below, which you can click on for greater detail, shows that Silla Sg had debt of ₩20.2b at the end of September 2020, a reduction from ₩25.6b over a year. 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. Offsetting this, it had ₩3.62b in cash and ₩3.85b in receivables that were due within 12 months. So it has liabilities totalling ₩23.3b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of ₩36.5b, so it does suggest shareholders should keep an eye on Silla Sg's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
In the last year Silla Sg had a loss before interest and tax, and actually shrunk its revenue by 21%, to ₩71b. 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). Indeed, it lost ₩1.4b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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 ₩1.6b into a profit. In the meantime, we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Silla Sg .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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About KOSDAQ:A025870
Excellent balance sheet and fair value.
