Is Sungchang Enterprise Holdings (KRX:000180) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Sungchang Enterprise Holdings Limited (KRX:000180) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Sungchang Enterprise Holdings

What Is Sungchang Enterprise Holdings's Net Debt?

As you can see below, Sungchang Enterprise Holdings had ₩96.7b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩16.4b in cash, and so its net debt is ₩80.3b.

A Look At Sungchang Enterprise Holdings' Liabilities

We can see from the most recent balance sheet that Sungchang Enterprise Holdings had liabilities of ₩110.6b falling due within a year, and liabilities of ₩87.0b due beyond that. On the other hand, it had cash of ₩16.4b and ₩26.7b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩154.4b.

The deficiency here weighs heavily on the ₩93.6b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Sungchang Enterprise Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sungchang Enterprise Holdings 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.

In the last year Sungchang Enterprise Holdings had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₩159b. To be frank that doesn't bode well.

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. Its EBIT loss was a whopping ₩11b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of ₩18b. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Sungchang Enterprise Holdings (1 is a bit unpleasant) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com