Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Solborn, Inc. (KOSDAQ:035610) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Solborn
How Much Debt Does Solborn Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Solborn had ₩2.83b of debt, an increase on ₩1.19b, over one year. However, it does have ₩64.9b in cash offsetting this, leading to net cash of ₩62.1b.
How Strong Is Solborn's Balance Sheet?
According to the last reported balance sheet, Solborn had liabilities of ₩19.2b due within 12 months, and liabilities of ₩6.97b due beyond 12 months. Offsetting these obligations, it had cash of ₩64.9b as well as receivables valued at ₩26.1b due within 12 months. So it actually has ₩64.9b more liquid assets than total liabilities.
This surplus liquidity suggests that Solborn's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Solborn has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Solborn 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.
Over 12 months, Solborn made a loss at the EBIT level, and saw its revenue drop to ₩82b, which is a fall of 11%. We would much prefer see growth.
So How Risky Is Solborn?
While Solborn lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩11b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Solborn that you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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 KOSDAQ:A035610
Solborn
Engages in the manufacturing and sales of medical equipment in South Korea.
Flawless balance sheet and good value.
