We Think Solution Advanced Technology (KOSDAQ:351320) Has A Fair Chunk Of Debt

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.' 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 Solution Advanced Technology Co., Ltd. (KOSDAQ:351320) 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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Solution Advanced Technology

How Much Debt Does Solution Advanced Technology Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Solution Advanced Technology had debt of ₩13.7b, up from ₩11.7b in one year. However, it also had ₩4.35b in cash, and so its net debt is ₩9.33b.

A Look At Solution Advanced Technology's Liabilities

The latest balance sheet data shows that Solution Advanced Technology had liabilities of ₩15.2b due within a year, and liabilities of ₩8.17b falling due after that. Offsetting this, it had ₩4.35b in cash and ₩5.71b in receivables that were due within 12 months. So it has liabilities totalling ₩13.3b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Solution Advanced Technology is worth ₩28.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Solution Advanced Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Solution Advanced Technology made a loss at the EBIT level, and saw its revenue drop to ₩9.2b, which is a fall of 58%. That makes us nervous, to say the least.

Caveat Emptor

While Solution Advanced Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩9.5b. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩4.8b 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. For instance, we've identified 3 warning signs for Solution Advanced Technology (2 are a bit unpleasant) you should be aware of.

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.