Is SBI FinTech Solutions (KOSDAQ:950110) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that SBI FinTech Solutions Co., Ltd. (KOSDAQ:950110) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SBI FinTech Solutions

What Is SBI FinTech Solutions's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 SBI FinTech Solutions had ₩120.9b of debt, an increase on ₩43.5b, over one year. However, its balance sheet shows it holds ₩225.5b in cash, so it actually has ₩104.6b net cash.

How Healthy Is SBI FinTech Solutions's Balance Sheet?

According to the last reported balance sheet, SBI FinTech Solutions had liabilities of ₩208.2b due within 12 months, and liabilities of ₩55.9b due beyond 12 months. Offsetting these obligations, it had cash of ₩225.5b as well as receivables valued at ₩4.42b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩34.1b.

Of course, SBI FinTech Solutions has a market capitalization of ₩183.2b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, SBI FinTech Solutions boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that SBI FinTech Solutions saw its EBIT decline by 5.3% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SBI FinTech Solutions'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. SBI FinTech Solutions may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, SBI FinTech Solutions burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While SBI FinTech Solutions does have more liabilities than liquid assets, it also has net cash of ₩104.6b. So although we see some areas for improvement, we're not too worried about SBI FinTech Solutions's balance sheet. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - SBI FinTech Solutions has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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. 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.
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