Is Softcen (KOSDAQ:032680) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Softcen Co., Ltd. (KOSDAQ:032680) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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

See our latest analysis for Softcen

What Is Softcen's Net Debt?

The image below, which you can click on for greater detail, shows that Softcen had debt of ₩23.1b at the end of September 2024, a reduction from ₩25.2b over a year. But it also has ₩43.9b in cash to offset that, meaning it has ₩20.8b net cash.

How Healthy Is Softcen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Softcen had liabilities of ₩54.4b due within 12 months and liabilities of ₩383.0m due beyond that. Offsetting these obligations, it had cash of ₩43.9b as well as receivables valued at ₩10.6b due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Softcen's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩36.7b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Softcen boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Softcen'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.

In the last year Softcen had a loss before interest and tax, and actually shrunk its revenue by 15%, to ₩60b. We would much prefer see growth.

So How Risky Is Softcen?

Although Softcen had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩8.6b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Softcen is showing 3 warning signs in our investment analysis , and 1 of those can't be ignored...

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.