Sugentech (KOSDAQ:253840) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Sugentech Inc. (KOSDAQ:253840) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sugentech

What Is Sugentech's Net Debt?

The image below, which you can click on for greater detail, shows that Sugentech had debt of ₩3.49b at the end of September 2020, a reduction from ₩13.4b over a year. But it also has ₩32.9b in cash to offset that, meaning it has ₩29.4b net cash.

A Look At Sugentech's Liabilities

We can see from the most recent balance sheet that Sugentech had liabilities of ₩5.30b falling due within a year, and liabilities of ₩2.43b due beyond that. Offsetting this, it had ₩32.9b in cash and ₩601.3m in receivables that were due within 12 months. So it actually has ₩25.7b more liquid assets than total liabilities.

This surplus suggests that Sugentech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sugentech boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Sugentech made a loss at the EBIT level, last year, it was also good to see that it generated ₩17b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sugentech will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sugentech may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent year, Sugentech recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sugentech has net cash of ₩29.4b, as well as more liquid assets than liabilities. So we don't have any problem with Sugentech's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Sugentech , and understanding them should be part of your investment process.

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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