Does Suresofttech (KOSDAQ:298830) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Suresofttech Inc. (KOSDAQ:298830) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Suresofttech

How Much Debt Does Suresofttech Carry?

As you can see below, at the end of June 2024, Suresofttech had ₩35.2b of debt, up from ₩33.7b a year ago. Click the image for more detail. But on the other hand it also has ₩41.2b in cash, leading to a ₩6.05b net cash position.

How Strong Is Suresofttech's Balance Sheet?

According to the last reported balance sheet, Suresofttech had liabilities of ₩44.9b due within 12 months, and liabilities of ₩14.3b due beyond 12 months. Offsetting these obligations, it had cash of ₩41.2b as well as receivables valued at ₩13.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩4.49b.

Having regard to Suresofttech's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩322.6b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Suresofttech boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Suresofttech saw its EBIT drop by 9.7% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Suresofttech's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Suresofttech 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. Considering the last three years, Suresofttech actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

We could understand if investors are concerned about Suresofttech's liabilities, but we can be reassured by the fact it has has net cash of ₩6.05b. So we are not troubled with Suresofttech's debt use. 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 1 warning sign for Suresofttech that you should be aware of before investing here.

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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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.