Is Sungchang Enterprise Holdings (KRX:000180) 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. We can see that Sungchang Enterprise Holdings Limited (KRX:000180) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sungchang Enterprise Holdings

What Is Sungchang Enterprise Holdings's Debt?

The image below, which you can click on for greater detail, shows that Sungchang Enterprise Holdings had debt of ₩80.5b at the end of September 2023, a reduction from ₩104.8b over a year. However, it also had ₩14.8b in cash, and so its net debt is ₩65.8b.

How Healthy Is Sungchang Enterprise Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sungchang Enterprise Holdings had liabilities of ₩112.0b due within 12 months and liabilities of ₩93.6b due beyond that. Offsetting these obligations, it had cash of ₩14.8b as well as receivables valued at ₩30.3b due within 12 months. So it has liabilities totalling ₩160.6b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₩129.9b, 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. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Sungchang Enterprise Holdings'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.

Over 12 months, Sungchang Enterprise Holdings made a loss at the EBIT level, and saw its revenue drop to ₩182b, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

While Sungchang Enterprise Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩21b 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. It's fair to say the loss of ₩21b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 2 warning signs for Sungchang Enterprise Holdings (1 is concerning!) that you should be aware of before investing here.

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.