Does Sungchang Enterprise Holdings (KRX:000180) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Sungchang Enterprise Holdings Limited (KRX:000180) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Sungchang Enterprise Holdings Carry?

As you can see below, Sungchang Enterprise Holdings had ₩42.8b of debt at December 2024, down from ₩91.8b a year prior. However, because it has a cash reserve of ₩12.0b, its net debt is less, at about ₩30.8b.

How Healthy Is Sungchang Enterprise Holdings' Balance Sheet?

We can see from the most recent balance sheet that Sungchang Enterprise Holdings had liabilities of ₩58.3b falling due within a year, and liabilities of ₩83.3b due beyond that. Offsetting these obligations, it had cash of ₩12.0b as well as receivables valued at ₩20.3b due within 12 months. So it has liabilities totalling ₩109.2b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₩95.8b, we think shareholders really should watch Sungchang Enterprise Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sungchang Enterprise Holdings'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.

See our latest analysis for Sungchang Enterprise Holdings

Over 12 months, Sungchang Enterprise Holdings made a loss at the EBIT level, and saw its revenue drop to ₩143b, which is a fall of 14%. That's not what we would hope to see.

Caveat Emptor

Not only did Sungchang Enterprise Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩7.3b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₩6.6b over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Sungchang Enterprise Holdings (2 can't be ignored!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.