SCL Science (KOSDAQ:246960) Is Carrying A Fair Bit Of 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 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. Importantly, SCL Science Inc. (KOSDAQ:246960) does carry debt. But should shareholders be worried about its use of debt?

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. 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.

View our latest analysis for SCL Science

How Much Debt Does SCL Science Carry?

You can click the graphic below for the historical numbers, but it shows that SCL Science had ₩3.99b of debt in September 2024, down from ₩6.83b, one year before. However, because it has a cash reserve of ₩3.40b, its net debt is less, at about ₩591.8m.

How Strong Is SCL Science's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SCL Science had liabilities of ₩1.72b due within 12 months and liabilities of ₩4.87b due beyond that. Offsetting these obligations, it had cash of ₩3.40b as well as receivables valued at ₩1.83b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩1.36b.

Of course, SCL Science has a market capitalization of ₩66.1b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, SCL Science has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is SCL Science'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 SCL Science wasn't profitable at an EBIT level, but managed to grow its revenue by 366%, to ₩3.8b. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

Even though SCL Science managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost ₩3.1b 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩8.9b of cash over the last year. So suffice it to say we consider the stock very risky. 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. Be aware that SCL Science is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...

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. 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.