S.NetSystems.Inc (KOSDAQ:038680) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies S.NetSystems.Inc. (KOSDAQ:038680) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for S.NetSystems.Inc

How Much Debt Does S.NetSystems.Inc Carry?

As you can see below, S.NetSystems.Inc had ₩15.7b of debt at March 2024, down from ₩53.1b a year prior. On the flip side, it has ₩13.1b in cash leading to net debt of about ₩2.57b.

How Strong Is S.NetSystems.Inc's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that S.NetSystems.Inc had liabilities of ₩147.8b due within 12 months and liabilities of ₩5.58b due beyond that. Offsetting these obligations, it had cash of ₩13.1b as well as receivables valued at ₩43.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩96.7b.

Given this deficit is actually higher than the company's market capitalization of ₩77.7b, we think shareholders really should watch S.NetSystems.Inc's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.16 and interest cover of 4.8 times, it seems to us that S.NetSystems.Inc is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Notably, S.NetSystems.Inc's EBIT launched higher than Elon Musk, gaining a whopping 107% on last year. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last two years, S.NetSystems.Inc created free cash flow amounting to 15% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

While S.NetSystems.Inc's level of total liabilities has us nervous. To wit both its EBIT growth rate and net debt to EBITDA were encouraging signs. Looking at all the angles mentioned above, it does seem to us that S.NetSystems.Inc is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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 example S.NetSystems.Inc has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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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.