Is Snet systems (KOSDAQ:038680) A Risky Investment?

Warren Buffett famously said, '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. Importantly, Snet systems Inc (KOSDAQ:038680) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Snet systems

What Is Snet systems's Debt?

As you can see below, at the end of June 2020, Snet systems had ₩15.3b of debt, up from ₩359.2m a year ago. Click the image for more detail. But on the other hand it also has ₩46.7b in cash, leading to a ₩31.5b net cash position.

How Strong Is Snet systems's Balance Sheet?

According to the last reported balance sheet, Snet systems had liabilities of ₩86.4b due within 12 months, and liabilities of ₩5.67b due beyond 12 months. Offsetting these obligations, it had cash of ₩46.7b as well as receivables valued at ₩35.3b due within 12 months. So it has liabilities totalling ₩10.0b more than its cash and near-term receivables, combined.

Given Snet systems has a market capitalization of ₩102.7b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 93% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Snet systems's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Snet systems has ₩31.5b in net cash. And it impressed us with free cash flow of ₩3.5b, being 76% of its EBIT. So we don't have any problem with Snet systems's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Snet systems has 1 warning sign we think 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.

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