Is SillaJen (KOSDAQ:215600) Using Too Much Debt?

Warren Buffett famously said, '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, SillaJen, Inc. (KOSDAQ:215600) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SillaJen

What Is SillaJen's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SillaJen had ₩8.88b of debt in June 2024, down from ₩14.1b, one year before. However, its balance sheet shows it holds ₩139.7b in cash, so it actually has ₩130.8b net cash.

A Look At SillaJen's Liabilities

Zooming in on the latest balance sheet data, we can see that SillaJen had liabilities of ₩19.2b due within 12 months and liabilities of ₩746.0m due beyond that. Offsetting these obligations, it had cash of ₩139.7b as well as receivables valued at ₩838.2m due within 12 months. So it can boast ₩120.6b more liquid assets than total liabilities.

This excess liquidity is a great indication that SillaJen's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that SillaJen has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SillaJen 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.

Over 12 months, SillaJen made a loss at the EBIT level, and saw its revenue drop to ₩1.7b, which is a fall of 75%. That makes us nervous, to say the least.

So How Risky Is SillaJen?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that SillaJen had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩19b and booked a ₩23b accounting loss. But the saving grace is the ₩130.8b on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 2 warning signs for SillaJen that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.