Here's Why STI (KOSDAQ:039440) Has A Meaningful Debt Burden

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, STI Co., Ltd. (KOSDAQ:039440) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for STI

What Is STI's Net Debt?

The image below, which you can click on for greater detail, shows that STI had debt of ₩21.8b at the end of September 2020, a reduction from ₩52.6b over a year. But on the other hand it also has ₩40.8b in cash, leading to a ₩19.1b net cash position.

How Healthy Is STI's Balance Sheet?

According to the last reported balance sheet, STI had liabilities of ₩76.4b due within 12 months, and liabilities of ₩4.67b due beyond 12 months. On the other hand, it had cash of ₩40.8b and ₩55.1b worth of receivables due within a year. So it can boast ₩14.8b 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.

In fact STI's saving grace is its low debt levels, because its EBIT has tanked 31% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. STI 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. Over the last three years, STI saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case STI has ₩19.1b in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about STI'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 example, we've discovered 2 warning signs for STI that you should be aware of before investing here.

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. 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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