Does STI (KOSDAQ:039440) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 STI Co., Ltd. (KOSDAQ:039440) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for STI

What Is STI's Net Debt?

As you can see below, at the end of December 2020, STI had ₩16.9b of debt, up from ₩12.8b a year ago. Click the image for more detail. But it also has ₩76.6b in cash to offset that, meaning it has ₩59.7b net cash.

How Healthy Is STI's Balance Sheet?

According to the last reported balance sheet, STI had liabilities of ₩67.2b due within 12 months, and liabilities of ₩3.84b due beyond 12 months. Offsetting these obligations, it had cash of ₩76.6b as well as receivables valued at ₩33.6b due within 12 months. So it can boast ₩39.1b more liquid assets than total liabilities.

This short term liquidity is a sign that STI could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that STI has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that STI's load is not too heavy, because its EBIT was down 43% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine STI's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While STI 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. Over the last three years, STI reported free cash flow worth 3.6% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case STI has ₩59.7b in net cash and a decent-looking balance sheet. So we don't have any problem with STI's use of debt. 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. We've identified 2 warning signs with STI , and understanding them should be part of your investment process.

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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