Is Sangshin Electronics (KOSDAQ:263810) Using Too Much 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 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 Sangshin Electronics Co., Ltd. (KOSDAQ:263810) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sangshin Electronics

How Much Debt Does Sangshin Electronics Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Sangshin Electronics had debt of ₩8.27b, up from ₩7.22b in one year. But it also has ₩12.1b in cash to offset that, meaning it has ₩3.80b net cash.

A Look At Sangshin Electronics's Liabilities

The latest balance sheet data shows that Sangshin Electronics had liabilities of ₩21.1b due within a year, and liabilities of ₩1.44b falling due after that. Offsetting this, it had ₩12.1b in cash and ₩15.9b in receivables that were due within 12 months. So it actually has ₩5.38b more liquid assets than total liabilities.

This short term liquidity is a sign that Sangshin Electronics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Sangshin Electronics has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Sangshin Electronics's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sangshin Electronics's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Sangshin Electronics 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. Over the last three years, Sangshin Electronics saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sangshin Electronics has net cash of ₩3.80b, as well as more liquid assets than liabilities. So we are not troubled with Sangshin Electronics's debt use. 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. For example, we've discovered 2 warning signs for Sangshin Electronics (1 can't be ignored!) that you should be aware of before investing here.

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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