We Think Selvas AI (KOSDAQ:108860) Has A Fair Chunk Of Debt

Warren Buffett famously said, '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 Selvas AI Inc. (KOSDAQ:108860) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Selvas AI

How Much Debt Does Selvas AI Carry?

The image below, which you can click on for greater detail, shows that Selvas AI had debt of ₩29.0b at the end of September 2020, a reduction from ₩35.8b over a year. However, because it has a cash reserve of ₩23.4b, its net debt is less, at about ₩5.66b.

A Look At Selvas AI's Liabilities

We can see from the most recent balance sheet that Selvas AI had liabilities of ₩32.1b falling due within a year, and liabilities of ₩12.2b due beyond that. Offsetting this, it had ₩23.4b in cash and ₩7.18b in receivables that were due within 12 months. So its liabilities total ₩13.8b more than the combination of its cash and short-term receivables.

Selvas AI has a market capitalization of ₩67.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Selvas AI 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, Selvas AI saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Selvas AI had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩2.2b 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. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₩2.7b and the profit of ₩2.9b. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. For example Selvas AI has 3 warning signs (and 1 which makes us a bit uncomfortable) 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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