Shinsung ST (KOSDAQ:416180) Seems To Use Debt Quite Sensibly

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 Shinsung ST Co., Ltd. (KOSDAQ:416180) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shinsung ST's Net Debt?

As you can see below, Shinsung ST had ₩17.3b of debt at December 2024, down from ₩21.2b a year prior. But on the other hand it also has ₩45.6b in cash, leading to a ₩28.3b net cash position.

A Look At Shinsung ST's Liabilities

Zooming in on the latest balance sheet data, we can see that Shinsung ST had liabilities of ₩37.3b due within 12 months and liabilities of ₩4.61b due beyond that. Offsetting this, it had ₩45.6b in cash and ₩34.1b in receivables that were due within 12 months. So it actually has ₩37.9b more liquid assets than total liabilities.

This short term liquidity is a sign that Shinsung ST could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Shinsung ST boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Shinsung ST

Fortunately, Shinsung ST grew its EBIT by 5.2% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shinsung ST will need earnings to service that debt. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Shinsung ST 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. In the last three years, Shinsung ST created free cash flow amounting to 16% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Shinsung ST has ₩28.3b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 5.2% in the last twelve months. So we don't have any problem with Shinsung ST's use of debt. 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. For example, we've discovered 1 warning sign for Shinsung ST that you should be aware of before investing here.

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.