SIMMTECH (KOSDAQ:222800) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that SIMMTECH Co., Ltd. (KOSDAQ:222800) does use debt in its business. But is this debt a concern to shareholders?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SIMMTECH

How Much Debt Does SIMMTECH Carry?

As you can see below, at the end of March 2024, SIMMTECH had ₩348.7b of debt, up from ₩193.3b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩135.4b, its net debt is less, at about ₩213.4b.

How Healthy Is SIMMTECH's Balance Sheet?

We can see from the most recent balance sheet that SIMMTECH had liabilities of ₩709.3b falling due within a year, and liabilities of ₩204.0b due beyond that. Offsetting this, it had ₩135.4b in cash and ₩159.7b in receivables that were due within 12 months. So it has liabilities totalling ₩618.2b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩971.3b, so it does suggest shareholders should keep an eye on SIMMTECH's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if SIMMTECH can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year SIMMTECH had a loss before interest and tax, and actually shrunk its revenue by 24%, to ₩1.1t. To be frank that doesn't bode well.

Caveat Emptor

Not only did SIMMTECH's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩71b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩261b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with SIMMTECH .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com