Is SKC (KRX:011790) Using Debt Sensibly?

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 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. As with many other companies SKC Co., Ltd. (KRX:011790) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SKC

What Is SKC's Debt?

As you can see below, at the end of December 2023, SKC had ₩3.40t of debt, up from ₩3.25t a year ago. Click the image for more detail. However, it does have ₩583.3b in cash offsetting this, leading to net debt of about ₩2.82t.

How Strong Is SKC's Balance Sheet?

According to the last reported balance sheet, SKC had liabilities of ₩1.83t due within 12 months, and liabilities of ₩2.68t due beyond 12 months. Offsetting this, it had ₩583.3b in cash and ₩179.6b in receivables that were due within 12 months. So its liabilities total ₩3.75t more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩3.92t, so it does suggest shareholders should keep an eye on SKC's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SKC's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, SKC made a loss at the EBIT level, and saw its revenue drop to ₩1.6t, which is a fall of 34%. That makes us nervous, to say the least.

Caveat Emptor

Not only did SKC's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩216b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩1.3t of cash over the last year. So in short it's a really risky stock. 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 SKC has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.