Is SCL Science (KOSDAQ:246960) Using Too Much Debt?

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.' 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, SCL Science Inc. (KOSDAQ:246960) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for SCL Science

What Is SCL Science's Debt?

You can click the graphic below for the historical numbers, but it shows that SCL Science had ₩7.74b of debt in December 2023, down from ₩12.1b, one year before. But on the other hand it also has ₩9.15b in cash, leading to a ₩1.41b net cash position.

A Look At SCL Science's Liabilities

We can see from the most recent balance sheet that SCL Science had liabilities of ₩3.36b falling due within a year, and liabilities of ₩7.90b due beyond that. Offsetting these obligations, it had cash of ₩9.15b as well as receivables valued at ₩1.05b due within 12 months. So its liabilities total ₩1.05b more than the combination of its cash and short-term receivables.

This state of affairs indicates that SCL Science's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩73.9b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, SCL Science also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is SCL Science's earnings that will influence how the balance sheet holds up in the future. 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 SCL Science wasn't profitable at an EBIT level, but managed to grow its revenue by 258%, to ₩1.3b. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is SCL Science?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months SCL Science lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩5.7b and booked a ₩5.0b accounting loss. But at least it has ₩1.41b on the balance sheet to spend on growth, near-term. The good news for shareholders is that SCL Science has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. To that end, you should learn about the 5 warning signs we've spotted with SCL Science (including 3 which are significant) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.