Would Sungmoon Electronics (KRX:014910) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Sungmoon Electronics Co., Ltd. (KRX:014910) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Sungmoon Electronics

What Is Sungmoon Electronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sungmoon Electronics had ₩5.82b of debt in December 2020, down from ₩6.45b, one year before. However, it does have ₩4.04b in cash offsetting this, leading to net debt of about ₩1.78b.

A Look At Sungmoon Electronics' Liabilities

According to the last reported balance sheet, Sungmoon Electronics had liabilities of ₩11.6b due within 12 months, and liabilities of ₩2.19b due beyond 12 months. On the other hand, it had cash of ₩4.04b and ₩11.9b worth of receivables due within a year. So it can boast ₩2.12b more liquid assets than total liabilities.

This short term liquidity is a sign that Sungmoon Electronics could probably pay off its debt with ease, as its balance sheet is far from stretched. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sungmoon Electronics'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.

In the last year Sungmoon Electronics wasn't profitable at an EBIT level, but managed to grow its revenue by 5.5%, to ₩38b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Sungmoon Electronics produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩608m. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. 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 instance, we've identified 1 warning sign for Sungmoon Electronics that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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