Is Signetics (KOSDAQ:033170) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Signetics Corporation (KOSDAQ:033170) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Signetics

What Is Signetics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Signetics had ₩25.7b of debt, an increase on ₩17.1b, over one year. On the flip side, it has ₩11.8b in cash leading to net debt of about ₩13.9b.

How Strong Is Signetics's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Signetics had liabilities of ₩54.4b due within 12 months and liabilities of ₩6.50b due beyond that. Offsetting these obligations, it had cash of ₩11.8b as well as receivables valued at ₩26.2b due within 12 months. So its liabilities total ₩22.9b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Signetics has a market capitalization of ₩65.4b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Signetics's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Signetics had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₩196b. That's not what we would hope to see.

Caveat Emptor

Not only did Signetics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩22b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩5.7b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 3 warning signs for Signetics (2 make us uncomfortable) 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. 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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