Sungwoo Techron. Co.Ltd (KOSDAQ:045300) Could Easily Take On More Debt

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. As with many other companies Sungwoo Techron. Co,.Ltd (KOSDAQ:045300) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sungwoo Techron. Co.Ltd

What Is Sungwoo Techron. Co.Ltd's Debt?

The chart below, which you can click on for greater detail, shows that Sungwoo Techron. Co.Ltd had ₩15.0b in debt in December 2020; about the same as the year before. However, it does have ₩28.9b in cash offsetting this, leading to net cash of ₩13.9b.

How Healthy Is Sungwoo Techron. Co.Ltd's Balance Sheet?

According to the last reported balance sheet, Sungwoo Techron. Co.Ltd had liabilities of ₩23.5b due within 12 months, and liabilities of ₩2.54b due beyond 12 months. On the other hand, it had cash of ₩28.9b and ₩6.34b worth of receivables due within a year. So it can boast ₩9.16b more liquid assets than total liabilities.

It's good to see that Sungwoo Techron. Co.Ltd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Sungwoo Techron. Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Sungwoo Techron. Co.Ltd has boosted its EBIT by 95%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Sungwoo Techron. Co.Ltd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sungwoo Techron. Co.Ltd 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, Sungwoo Techron. Co.Ltd recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sungwoo Techron. Co.Ltd has net cash of ₩13.9b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩8.1b, being 100% of its EBIT. When it comes to Sungwoo Techron. Co.Ltd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sungwoo Techron. Co.Ltd is showing 2 warning signs in our investment analysis , 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. 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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