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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, S.NetSystems.Inc. (KOSDAQ:038680) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for S.NetSystems.Inc
How Much Debt Does S.NetSystems.Inc Carry?
You can click the graphic below for the historical numbers, but it shows that S.NetSystems.Inc had ₩19.8b of debt in September 2024, down from ₩40.5b, one year before. However, its balance sheet shows it holds ₩25.3b in cash, so it actually has ₩5.54b net cash.
A Look At S.NetSystems.Inc's Liabilities
We can see from the most recent balance sheet that S.NetSystems.Inc had liabilities of ₩154.2b falling due within a year, and liabilities of ₩6.84b due beyond that. Offsetting these obligations, it had cash of ₩25.3b as well as receivables valued at ₩50.2b due within 12 months. So it has liabilities totalling ₩85.6b more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of ₩90.9b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, S.NetSystems.Inc also has more cash than debt, so we're pretty confident it can manage its debt safely.
While S.NetSystems.Inc doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 S.NetSystems.Inc's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. S.NetSystems.Inc 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. Over the last two years, S.NetSystems.Inc actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While S.NetSystems.Inc does have more liabilities than liquid assets, it also has net cash of ₩5.54b. The cherry on top was that in converted 188% of that EBIT to free cash flow, bringing in ₩29b. So we are not troubled with S.NetSystems.Inc's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with S.NetSystems.Inc .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
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.
About KOSDAQ:A038680
S.NetSystems.Inc
Operates as a specialized ICT company in South Korea and internationally.
Solid track record with excellent balance sheet.