Is Ssangyong Information & Communications (KOSDAQ:010280) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ssangyong Information & Communications Corp. (KOSDAQ:010280) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ssangyong Information & Communications

What Is Ssangyong Information & Communications's Net Debt?

As you can see below, at the end of September 2024, Ssangyong Information & Communications had ₩19.3b of debt, up from ₩12.8b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩62.4b in cash, so it actually has ₩43.1b net cash.

How Strong Is Ssangyong Information & Communications' Balance Sheet?

We can see from the most recent balance sheet that Ssangyong Information & Communications had liabilities of ₩166.6b falling due within a year, and liabilities of ₩7.34b due beyond that. Offsetting these obligations, it had cash of ₩62.4b as well as receivables valued at ₩45.7b due within 12 months. So it has liabilities totalling ₩65.9b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩37.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Ssangyong Information & Communications would probably need a major re-capitalization if its creditors were to demand repayment. Ssangyong Information & Communications boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

It is just as well that Ssangyong Information & Communications's load is not too heavy, because its EBIT was down 57% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ssangyong Information & Communications will need earnings to service that debt. 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 Ssangyong Information & Communications 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. Over the most recent three years, Ssangyong Information & Communications recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Ssangyong Information & Communications's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩43.1b. Despite the cash, we do find Ssangyong Information & Communications's level of total liabilities concerning, so we're not particularly comfortable with the stock. 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. Case in point: We've spotted 2 warning signs for Ssangyong Information & Communications you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.