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. As with many other companies SoftCamp Co., Ltd. (KOSDAQ:258790) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for SoftCamp
What Is SoftCamp's Debt?
The image below, which you can click on for greater detail, shows that SoftCamp had debt of ₩6.36b at the end of June 2024, a reduction from ₩8.80b over a year. However, it also had ₩4.17b in cash, and so its net debt is ₩2.19b.
A Look At SoftCamp's Liabilities
The latest balance sheet data shows that SoftCamp had liabilities of ₩7.72b due within a year, and liabilities of ₩4.86b falling due after that. On the other hand, it had cash of ₩4.17b and ₩3.75b worth of receivables due within a year. So it has liabilities totalling ₩4.67b more than its cash and near-term receivables, combined.
SoftCamp has a market capitalization of ₩21.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SoftCamp will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year SoftCamp had a loss before interest and tax, and actually shrunk its revenue by 13%, to ₩17b. That's not what we would hope to see.
Caveat Emptor
While SoftCamp's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩4.6b. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩576m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with SoftCamp (including 1 which is significant) .
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.
About KOSDAQ:A258790
SoftCamp
Provides cyber security solutions in South Korea and internationally.
Mediocre balance sheet and slightly overvalued.
