Is Savezone I&C (KRX:067830) A Risky Investment?

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. As with many other companies Savezone I&C Corporation (KRX:067830) makes use of 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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Savezone I&C

What Is Savezone I&C's Debt?

You can click the graphic below for the historical numbers, but it shows that Savezone I&C had ₩28.7b of debt in September 2020, down from ₩37.1b, one year before. However, its balance sheet shows it holds ₩52.0b in cash, so it actually has ₩23.3b net cash.

How Strong Is Savezone I&C's Balance Sheet?

The latest balance sheet data shows that Savezone I&C had liabilities of ₩57.3b due within a year, and liabilities of ₩48.9b falling due after that. On the other hand, it had cash of ₩52.0b and ₩8.56b worth of receivables due within a year. So its liabilities total ₩45.7b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Savezone I&C is worth ₩135.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Savezone I&C boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Savezone I&C if management cannot prevent a repeat of the 41% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Savezone I&C will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Savezone I&C 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. Looking at the most recent three years, Savezone I&C recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although Savezone I&C's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩23.3b. So although we see some areas for improvement, we're not too worried about Savezone I&C's balance sheet. 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 instance, we've identified 4 warning signs for Savezone I&C (1 is potentially serious) you should be aware of.

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. 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.
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