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 can see that SoftCamp Co., Ltd. (KOSDAQ:258790) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
View our latest analysis for SoftCamp
What Is SoftCamp's Net Debt?
The image below, which you can click on for greater detail, shows that SoftCamp had debt of ₩6.40b at the end of March 2024, a reduction from ₩7.83b over a year. However, it also had ₩5.00b in cash, and so its net debt is ₩1.40b.
How Healthy Is SoftCamp's Balance Sheet?
We can see from the most recent balance sheet that SoftCamp had liabilities of ₩6.99b falling due within a year, and liabilities of ₩4.86b due beyond that. On the other hand, it had cash of ₩5.00b and ₩4.00b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩2.84b.
Given SoftCamp has a market capitalization of ₩29.8b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SoftCamp'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 SoftCamp had a loss before interest and tax, and actually shrunk its revenue by 4.3%, to ₩18b. That's not what we would hope to see.
Caveat Emptor
Over the last twelve months SoftCamp produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₩3.7b 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. 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 ₩876m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 SoftCamp has 2 warning signs (and 1 which is significant) 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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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.
About KOSDAQ:A258790
SoftCamp
Provides cyber security solutions in South Korea and internationally.
Very low with weak fundamentals.