Is SGA SolutionsLtd (KOSDAQ:184230) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 SGA Solutions Co.,Ltd. (KOSDAQ:184230) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SGA SolutionsLtd

What Is SGA SolutionsLtd's Debt?

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, it does have ₩8.04b in cash offsetting this, leading to net debt of about ₩5.39b.

How Healthy Is SGA SolutionsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SGA SolutionsLtd had liabilities of ₩17.1b due within 12 months 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 it has liabilities totalling ₩16.4b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since SGA SolutionsLtd has a market capitalization of ₩56.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year SGA SolutionsLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.8%, to ₩43b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, SGA SolutionsLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩6.3b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for SGA SolutionsLtd (1 is a bit concerning!) that you should be aware of before investing here.

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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