Sungwoo Techron. Co.Ltd (KOSDAQ:045300) Has A Pretty Healthy Balance Sheet

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 Sungwoo Techron. Co,.Ltd (KOSDAQ:045300) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sungwoo Techron. Co.Ltd

How Much Debt Does Sungwoo Techron. Co.Ltd Carry?

The chart below, which you can click on for greater detail, shows that Sungwoo Techron. Co.Ltd had ₩15.0b in debt in September 2020; about the same as the year before. But it also has ₩29.1b in cash to offset that, meaning it has ₩14.1b net cash.

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

We can see from the most recent balance sheet that Sungwoo Techron. Co.Ltd had liabilities of ₩26.2b falling due within a year, and liabilities of ₩2.35b due beyond that. Offsetting this, it had ₩29.1b in cash and ₩7.19b in receivables that were due within 12 months. So it can boast ₩7.79b more liquid assets than total liabilities.

This excess liquidity suggests that Sungwoo Techron. Co.Ltd is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Sungwoo Techron. Co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that Sungwoo Techron. Co.Ltd has seen its EBIT plunge 15% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sungwoo Techron. Co.Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sungwoo Techron. Co.Ltd 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. During the last three years, Sungwoo Techron. Co.Ltd generated free cash flow amounting to a very robust 91% of its EBIT, more than we'd 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 ₩14.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩12b, being 91% of its EBIT. So we don't think Sungwoo Techron. Co.Ltd's use of debt is 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. Case in point: We've spotted 3 warning signs for Sungwoo Techron. Co.Ltd you should be aware of.

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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