We Think SK ChemicalsLtd (KRX:285130) Can Stay On Top Of Its 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. Importantly, SK Chemicals Co.,Ltd (KRX:285130) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 SK ChemicalsLtd

What Is SK ChemicalsLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 SK ChemicalsLtd had debt of ₩1.54t, up from ₩964.5b in one year. However, it does have ₩1.68t in cash offsetting this, leading to net cash of ₩145.9b.

How Strong Is SK ChemicalsLtd's Balance Sheet?

The latest balance sheet data shows that SK ChemicalsLtd had liabilities of ₩1.01t due within a year, and liabilities of ₩901.3b falling due after that. Offsetting these obligations, it had cash of ₩1.68t as well as receivables valued at ₩254.0b due within 12 months. So these liquid assets roughly match the total liabilities.

This surplus suggests that SK ChemicalsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that SK ChemicalsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Unfortunately, SK ChemicalsLtd saw its EBIT slide 4.5% in the last twelve months. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine SK ChemicalsLtd'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SK ChemicalsLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, SK ChemicalsLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that SK ChemicalsLtd has net cash of ₩145.9b, as well as more liquid assets than liabilities. So we are not troubled with SK ChemicalsLtd's debt use. 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. Case in point: We've spotted 3 warning signs for SK ChemicalsLtd 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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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.