Is SFA Semicon (KOSDAQ:036540) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies SFA Semicon Co., Ltd. (KOSDAQ:036540) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for SFA Semicon

How Much Debt Does SFA Semicon Carry?

You can click the graphic below for the historical numbers, but it shows that SFA Semicon had ₩70.6b of debt in September 2023, down from ₩95.8b, one year before. However, its balance sheet shows it holds ₩85.8b in cash, so it actually has ₩15.2b net cash.

A Look At SFA Semicon's Liabilities

The latest balance sheet data shows that SFA Semicon had liabilities of ₩47.7b due within a year, and liabilities of ₩98.3b falling due after that. Offsetting these obligations, it had cash of ₩85.8b as well as receivables valued at ₩37.9b due within 12 months. So its liabilities total ₩22.3b more than the combination of its cash and short-term receivables.

Since publicly traded SFA Semicon shares are worth a total of ₩980.5b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, SFA Semicon also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SFA Semicon'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.

In the last year SFA Semicon had a loss before interest and tax, and actually shrunk its revenue by 31%, to ₩497b. To be frank that doesn't bode well.

So How Risky Is SFA Semicon?

While SFA Semicon lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩33b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for SFA Semicon you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.