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. We note that Silla Co.,Ltd (KRX:004970) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for SillaLtd
What Is SillaLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 SillaLtd had ₩59.7b of debt, an increase on ₩42.1b, over one year. However, its balance sheet shows it holds ₩93.7b in cash, so it actually has ₩33.9b net cash.
A Look At SillaLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that SillaLtd had liabilities of ₩108.1b due within 12 months and liabilities of ₩20.8b due beyond that. Offsetting this, it had ₩93.7b in cash and ₩49.6b in receivables that were due within 12 months. So it actually has ₩14.4b more liquid assets than total liabilities.
This short term liquidity is a sign that SillaLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that SillaLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SillaLtd'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.
In the last year SillaLtd had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to ₩365b. That's not what we would hope to see.
So How Risky Is SillaLtd?
While SillaLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩923m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for SillaLtd (1 is concerning!) that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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:A004970
Excellent balance sheet, good value and pays a dividend.
