Is Sajo Industries (KRX:007160) Using Too Much Debt?

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 can see that Sajo Industries Company Limited (KRX:007160) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Sajo Industries

How Much Debt Does Sajo Industries Carry?

As you can see below, Sajo Industries had ₩427.5b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩68.0b in cash, and so its net debt is ₩359.5b.

How Healthy Is Sajo Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sajo Industries had liabilities of ₩350.5b due within 12 months and liabilities of ₩291.4b due beyond that. On the other hand, it had cash of ₩68.0b and ₩110.7b worth of receivables due within a year. So it has liabilities totalling ₩463.2b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩169.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Sajo Industries would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sajo Industries will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Sajo Industries had a loss before interest and tax, and actually shrunk its revenue by 23%, to ₩609b. That makes us nervous, to say the least.

Caveat Emptor

While Sajo Industries's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩5.6b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost ₩9.6b in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Sajo Industries 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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