Is SUNIC SYSTEM (KOSDAQ:171090) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, SUNIC SYSTEM Co., Ltd. (KOSDAQ:171090) does carry debt. But the real question is whether this debt is making the company risky.

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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 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, 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.

What Is SUNIC SYSTEM's Debt?

The image below, which you can click on for greater detail, shows that at March 2025 SUNIC SYSTEM had debt of ₩74.5b, up from ₩23.8b in one year. However, its balance sheet shows it holds ₩76.4b in cash, so it actually has ₩1.88b net cash.

A Look At SUNIC SYSTEM's Liabilities

According to the last reported balance sheet, SUNIC SYSTEM had liabilities of ₩297.3b due within 12 months, and liabilities of ₩23.5b due beyond 12 months. Offsetting these obligations, it had cash of ₩76.4b as well as receivables valued at ₩16.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩227.6b.

This is a mountain of leverage relative to its market capitalization of ₩311.3b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, SUNIC SYSTEM also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for SUNIC SYSTEM

We also note that SUNIC SYSTEM improved its EBIT from a last year's loss to a positive ₩7.3b. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine SUNIC SYSTEM'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. While SUNIC SYSTEM 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. During the last year, SUNIC SYSTEM burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although SUNIC SYSTEM's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩1.88b. Despite the cash, we do find SUNIC SYSTEM's conversion of EBIT to free cash flow concerning, so we're not particularly comfortable with the stock. While SUNIC SYSTEM didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.