We Think Sangshin Electronics (KOSDAQ:263810) Is Taking Some Risk With Its 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Sangshin Electronics Co., Ltd. (KOSDAQ:263810) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Sangshin Electronics

What Is Sangshin Electronics's Net Debt?

As you can see below, at the end of September 2020, Sangshin Electronics had ₩8.27b of debt, up from ₩7.22b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩12.1b in cash, so it actually has ₩3.80b net cash.

A Look At Sangshin Electronics' Liabilities

Zooming in on the latest balance sheet data, we can see that Sangshin Electronics had liabilities of ₩21.1b due within 12 months and liabilities of ₩1.44b due beyond that. Offsetting these obligations, it had cash of ₩12.1b as well as receivables valued at ₩15.9b due within 12 months. So it can boast ₩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. Succinctly put, Sangshin Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Sangshin Electronics has seen its EBIT plunge 13% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sangshin 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Sangshin Electronics has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Sangshin Electronics saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Sangshin Electronics has ₩3.80b in net cash and a decent-looking balance sheet. So while Sangshin Electronics does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 3 warning signs for Sangshin Electronics you should be aware of, and 1 of them 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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