Does Sungwoo Electronics (KOSDAQ:081580) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Sungwoo Electronics Co., Ltd. (KOSDAQ:081580) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sungwoo Electronics

What Is Sungwoo Electronics's Net Debt?

The chart below, which you can click on for greater detail, shows that Sungwoo Electronics had ₩26.7b in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds ₩32.9b in cash, so it actually has ₩6.16b net cash.

A Look At Sungwoo Electronics' Liabilities

According to the last reported balance sheet, Sungwoo Electronics had liabilities of ₩43.1b due within 12 months, and liabilities of ₩7.08b due beyond 12 months. Offsetting this, it had ₩32.9b in cash and ₩18.8b in receivables that were due within 12 months. So it actually has ₩1.45b more liquid assets than total liabilities.

This short term liquidity is a sign that Sungwoo Electronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Sungwoo Electronics 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 you can't view debt in total isolation; since Sungwoo Electronics 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.

Over 12 months, Sungwoo Electronics made a loss at the EBIT level, and saw its revenue drop to ₩137b, which is a fall of 12%. That's not what we would hope to see.

So How Risky Is Sungwoo Electronics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Sungwoo Electronics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩3.0b and booked a ₩2.6b accounting loss. With only ₩6.16b on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Sungwoo Electronics is showing 1 warning sign in our investment analysis , 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.