These 4 Measures Indicate That SILICON2 (KOSDAQ:257720) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies SILICON2 Co., Ltd. (KOSDAQ:257720) makes use of debt. But the real question is whether this debt is making the company risky.

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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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is SILICON2's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 SILICON2 had ₩143.4b of debt, an increase on ₩108.9b, over one year. However, its balance sheet shows it holds ₩149.9b in cash, so it actually has ₩6.49b net cash.

A Look At SILICON2's Liabilities

We can see from the most recent balance sheet that SILICON2 had liabilities of ₩138.4b falling due within a year, and liabilities of ₩124.9b due beyond that. On the other hand, it had cash of ₩149.9b and ₩76.9b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩36.4b.

This state of affairs indicates that SILICON2's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩3.66t company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, SILICON2 also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for SILICON2

Even more impressive was the fact that SILICON2 grew its EBIT by 123% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SILICON2's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. SILICON2 may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, SILICON2 saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about SILICON2's liabilities, but we can be reassured by the fact it has has net cash of ₩6.49b. And it impressed us with its EBIT growth of 123% over the last year. So we are not troubled with SILICON2's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for SILICON2 (1 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.