Does Snet systems (KOSDAQ:038680) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Snet systems Inc (KOSDAQ:038680) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Snet systems

What Is Snet systems's Net Debt?

As you can see below, at the end of December 2020, Snet systems had ₩45.4b of debt, up from ₩8.04b a year ago. Click the image for more detail. But it also has ₩60.1b in cash to offset that, meaning it has ₩14.8b net cash.

How Strong Is Snet systems' Balance Sheet?

We can see from the most recent balance sheet that Snet systems had liabilities of ₩112.4b falling due within a year, and liabilities of ₩33.4b due beyond that. Offsetting this, it had ₩60.1b in cash and ₩64.5b in receivables that were due within 12 months. So it has liabilities totalling ₩21.1b more than its cash and near-term receivables, combined.

Of course, Snet systems has a market capitalization of ₩105.6b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Snet systems also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Snet systems's saving grace is its low debt levels, because its EBIT has tanked 41% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Snet systems 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Snet systems may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Snet systems burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Snet systems does have more liabilities than liquid assets, it also has net cash of ₩14.8b. So while Snet systems does not have a great balance sheet, it's certainly not too bad. 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 learn about the 3 warning signs we've spotted with Snet systems (including 1 which is a bit concerning) .

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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