Would sTraffic co.Ltd (KOSDAQ:234300) Be Better Off With Less Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that sTraffic co,.Ltd. (KOSDAQ:234300) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for sTraffic co.Ltd

How Much Debt Does sTraffic co.Ltd Carry?

The image below, which you can click on for greater detail, shows that sTraffic co.Ltd had debt of ₩23.8b at the end of December 2020, a reduction from ₩40.5b over a year. On the flip side, it has ₩18.2b in cash leading to net debt of about ₩5.60b.

How Healthy Is sTraffic co.Ltd's Balance Sheet?

According to the last reported balance sheet, sTraffic co.Ltd had liabilities of ₩66.4b due within 12 months, and liabilities of ₩9.76b due beyond 12 months. Offsetting this, it had ₩18.2b in cash and ₩37.7b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩20.3b.

Of course, sTraffic co.Ltd has a market capitalization of ₩183.2b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is sTraffic co.Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, sTraffic co.Ltd reported revenue of ₩92b, which is a gain of 16%, 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 sTraffic co.Ltd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩3.1b. 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. Another cause for caution is that is bled ₩3.1b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. To that end, you should learn about the 3 warning signs we've spotted with sTraffic co.Ltd (including 1 which doesn't sit too well with us) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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