These 4 Measures Indicate That Savezone I&C (KRX:067830) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Savezone I&C Corporation (KRX:067830) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Savezone I&C

How Much Debt Does Savezone I&C Carry?

The image below, which you can click on for greater detail, shows that Savezone I&C had debt of ₩28.7b at the end of September 2020, a reduction from ₩37.1b over a year. But on the other hand it also has ₩52.0b in cash, leading to a ₩23.3b net cash position.

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 outweigh the sum of its cash and (near-term) receivables by ₩45.7b.

While this might seem like a lot, it is not so bad since Savezone I&C has a market capitalization of ₩111.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Savezone I&C also has more cash than debt, so we're pretty confident it can manage its debt safely.

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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Savezone I&C'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Savezone I&C 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. In the last three years, Savezone I&C's free cash flow amounted to 27% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Savezone I&C does have more liabilities than liquid assets, it also has net cash of ₩23.3b. So while Savezone I&C does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Savezone I&C is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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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