We Think SGA Co (KOSDAQ:049470) Has A Fair Chunk Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SGA Co,. Ltd (KOSDAQ:049470) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for SGA Co

How Much Debt Does SGA Co Carry?

As you can see below, SGA Co had ₩32.5b of debt at September 2020, down from ₩38.8b a year prior. On the flip side, it has ₩12.5b in cash leading to net debt of about ₩20.0b.

How Strong Is SGA Co's Balance Sheet?

The latest balance sheet data shows that SGA Co had liabilities of ₩39.2b due within a year, and liabilities of ₩12.2b falling due after that. Offsetting this, it had ₩12.5b in cash and ₩11.1b in receivables that were due within 12 months. So its liabilities total ₩27.7b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩44.1b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SGA Co will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, SGA Co made a loss at the EBIT level, and saw its revenue drop to ₩78b, which is a fall of 8.0%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months SGA Co produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₩7.6b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩11b. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that SGA Co is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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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