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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that SGA Solutions Co.,Ltd. (KOSDAQ:184230) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for SGA SolutionsLtd
How Much Debt Does SGA SolutionsLtd Carry?
You can click the graphic below for the historical numbers, but it shows that SGA SolutionsLtd had ₩13.4b of debt in September 2020, down from ₩23.3b, one year before. However, because it has a cash reserve of ₩8.04b, its net debt is less, at about ₩5.39b.
A Look At SGA SolutionsLtd's Liabilities
We can see from the most recent balance sheet that SGA SolutionsLtd had liabilities of ₩17.1b falling due within a year, and liabilities of ₩7.35b due beyond that. Offsetting these obligations, it had cash of ₩8.04b as well as receivables valued at ₩74.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩16.4b.
This deficit isn't so bad because SGA SolutionsLtd is worth ₩36.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SGA SolutionsLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, SGA SolutionsLtd reported revenue of ₩43b, which is a gain of 3.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months SGA SolutionsLtd produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩6.3b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₩22b into a profit. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for SGA SolutionsLtd (of which 1 doesn't sit too well with us!) 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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About KOSDAQ:A184230
Flawless balance sheet and slightly overvalued.
