Health Check: How Prudently Does Sungwoo Electronics (KOSDAQ:081580) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Sungwoo Electronics Co., Ltd. (KOSDAQ:081580) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sungwoo Electronics

What Is Sungwoo Electronics's Debt?

You can click the graphic below for the historical numbers, but it shows that Sungwoo Electronics had ₩20.9b of debt in September 2024, down from ₩27.0b, one year before. But it also has ₩24.5b in cash to offset that, meaning it has ₩3.60b net cash.

How Healthy Is Sungwoo Electronics' Balance Sheet?

We can see from the most recent balance sheet that Sungwoo Electronics had liabilities of ₩39.7b falling due within a year, and liabilities of ₩6.88b due beyond that. Offsetting this, it had ₩24.5b in cash and ₩23.2b in receivables that were due within 12 months. So it actually has ₩1.11b more liquid assets than total liabilities.

This surplus suggests that Sungwoo Electronics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sungwoo Electronics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Sungwoo Electronics'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 Sungwoo Electronics had a loss before interest and tax, and actually shrunk its revenue by 9.3%, to ₩139b. We would much prefer see growth.

So How Risky Is Sungwoo Electronics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Sungwoo Electronics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩8.8b and booked a ₩3.3b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩3.60b. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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 Sungwoo Electronics is showing 1 warning sign in our investment analysis , you should know about...

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.