SUNIC SYSTEM (KOSDAQ:171090) Has A Pretty Healthy Balance Sheet

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. We note that SUNIC SYSTEM Co., Ltd. (KOSDAQ:171090) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SUNIC SYSTEM

How Much Debt Does SUNIC SYSTEM Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 SUNIC SYSTEM had ₩5.36b of debt, an increase on ₩965.4m, over one year. But it also has ₩26.3b in cash to offset that, meaning it has ₩20.9b net cash.

A Look At SUNIC SYSTEM's Liabilities

The latest balance sheet data shows that SUNIC SYSTEM had liabilities of ₩21.7b due within a year, and liabilities of ₩1.19b falling due after that. Offsetting these obligations, it had cash of ₩26.3b as well as receivables valued at ₩4.10b due within 12 months. So it can boast ₩7.42b more liquid assets than total liabilities.

This short term liquidity is a sign that SUNIC SYSTEM could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SUNIC SYSTEM boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, SUNIC SYSTEM grew its EBIT by 127% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SUNIC SYSTEM'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 company can only pay off debt with cold hard cash, not accounting profits. 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 three years, 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

While we empathize with investors who find debt concerning, you should keep in mind that SUNIC SYSTEM has net cash of ₩20.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 127% year-on-year EBIT growth. So we don't have any problem with SUNIC SYSTEM's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with SUNIC SYSTEM (including 1 which is significant) .

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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