Here's Why S Connect (KOSDAQ:096630) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, S Connect Co., LTD. (KOSDAQ:096630) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for S Connect

What Is S Connect's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 S Connect had ₩65.0b of debt, an increase on ₩52.1b, over one year. However, it also had ₩44.5b in cash, and so its net debt is ₩20.5b.

How Healthy Is S Connect's Balance Sheet?

According to the last reported balance sheet, S Connect had liabilities of ₩76.0b due within 12 months, and liabilities of ₩26.0b due beyond 12 months. Offsetting this, it had ₩44.5b in cash and ₩33.2b in receivables that were due within 12 months. So it has liabilities totalling ₩24.4b more than its cash and near-term receivables, combined.

This deficit isn't so bad because S Connect is worth ₩112.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is S Connect'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 S Connect had a loss before interest and tax, and actually shrunk its revenue by 34%, to ₩192b. That makes us nervous, to say the least.

Caveat Emptor

While S Connect's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩30b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩33b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with S Connect , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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