Does STraffic Co (KOSDAQ:234300) 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.' 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. Importantly, STraffic Co,. Ltd (KOSDAQ:234300) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for STraffic Co

How Much Debt Does STraffic Co Carry?

The image below, which you can click on for greater detail, shows that at June 2024 STraffic Co had debt of ₩14.2b, up from ₩10.2b in one year. But on the other hand it also has ₩23.6b in cash, leading to a ₩9.37b net cash position.

How Healthy Is STraffic Co's Balance Sheet?

The latest balance sheet data shows that STraffic Co had liabilities of ₩83.0b due within a year, and liabilities of ₩16.5b falling due after that. Offsetting this, it had ₩23.6b in cash and ₩49.2b in receivables that were due within 12 months. So its liabilities total ₩26.8b more than the combination of its cash and short-term receivables.

STraffic Co has a market capitalization of ₩112.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, STraffic Co also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that STraffic Co has increased its EBIT by 6.9% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine STraffic Co's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While STraffic Co has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, STraffic Co saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While STraffic Co does have more liabilities than liquid assets, it also has net cash of ₩9.37b. And it also grew its EBIT by 6.9% over the last year. So we are not troubled with STraffic Co's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with STraffic Co , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.