Is SIMMTECH (KOSDAQ:222800) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that SIMMTECH Co., Ltd. (KOSDAQ:222800) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for SIMMTECH

What Is SIMMTECH's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 SIMMTECH had debt of ₩390.9b, up from ₩190.0b in one year. On the flip side, it has ₩129.3b in cash leading to net debt of about ₩261.6b.

How Healthy Is SIMMTECH's Balance Sheet?

According to the last reported balance sheet, SIMMTECH had liabilities of ₩760.5b due within 12 months, and liabilities of ₩201.3b due beyond 12 months. Offsetting these obligations, it had cash of ₩129.3b as well as receivables valued at ₩181.8b due within 12 months. So it has liabilities totalling ₩650.8b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₩522.3b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SIMMTECH can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year SIMMTECH had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to ₩1.2t. That's not what we would hope to see.

Caveat Emptor

Importantly, SIMMTECH had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩46b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₩144b over the last twelve months. So suffice it to say we consider the stock to be risky. 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. We've identified 1 warning sign with SIMMTECH , and understanding them should be part of your investment process.

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. 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.