Does SGA Co (KOSDAQ:049470) Have A Healthy Balance Sheet?

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 can see that SGA Co,. Ltd (KOSDAQ:049470) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for SGA Co

What Is SGA Co's Debt?

You can click the graphic below for the historical numbers, but it shows that SGA Co had ₩26.7b of debt in December 2020, down from ₩40.2b, one year before. On the flip side, it has ₩25.7b in cash leading to net debt of about ₩956.7m.

How Healthy Is SGA Co's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SGA Co had liabilities of ₩41.4b due within 12 months and liabilities of ₩3.57b due beyond that. Offsetting these obligations, it had cash of ₩25.7b as well as receivables valued at ₩21.6b due within 12 months. So it can boast ₩2.40b more liquid assets than total liabilities.

This short term liquidity is a sign that SGA Co could probably pay off its debt with ease, as its balance sheet is far from stretched.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Given net debt is only 0.21 times EBITDA, it is initially surprising to see that SGA Co's EBIT has low interest coverage of 1.1 times. So while we're not necessarily alarmed we think that its debt is far from trivial. Notably, SGA Co made a loss at the EBIT level, last year, but improved that to positive EBIT of ₩2.4b in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is SGA Co's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, SGA Co actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Happily, SGA Co's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. But we must concede we find its interest cover has the opposite effect. Taking all this data into account, it seems to us that SGA Co takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for SGA Co (of which 1 can't be ignored!) you should know about.

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.

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This article by Simply Wall St is general in nature. 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.
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