Is SH Energy & Chemical (KRX:002360) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that SH Energy & Chemical Co., Ltd. (KRX:002360) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for SH Energy & Chemical

How Much Debt Does SH Energy & Chemical Carry?

As you can see below, at the end of September 2020, SH Energy & Chemical had ₩10.7b of debt, up from ₩8.30b a year ago. Click the image for more detail. However, it does have ₩46.5b in cash offsetting this, leading to net cash of ₩35.8b.

A Look At SH Energy & Chemical's Liabilities

Zooming in on the latest balance sheet data, we can see that SH Energy & Chemical had liabilities of ₩6.98b due within 12 months and liabilities of ₩20.5b due beyond that. Offsetting this, it had ₩46.5b in cash and ₩13.5b in receivables that were due within 12 months. So it can boast ₩32.5b more liquid assets than total liabilities.

This excess liquidity suggests that SH Energy & Chemical is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that SH Energy & Chemical has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is SH Energy & Chemical'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.

Over 12 months, SH Energy & Chemical made a loss at the EBIT level, and saw its revenue drop to ₩97b, which is a fall of 36%. To be frank that doesn't bode well.

So How Risky Is SH Energy & Chemical?

Although SH Energy & Chemical had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩4.1b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for SH Energy & Chemical (1 is potentially serious!) 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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