Is Solus Advanced Materials (KRX:336370) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Solus Advanced Materials Co., Ltd. (KRX:336370) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Solus Advanced Materials

What Is Solus Advanced Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Solus Advanced Materials had ₩374.6b of debt, an increase on ₩352.0b, over one year. On the flip side, it has ₩274.1b in cash leading to net debt of about ₩100.5b.

How Strong Is Solus Advanced Materials' Balance Sheet?

We can see from the most recent balance sheet that Solus Advanced Materials had liabilities of ₩565.7b falling due within a year, and liabilities of ₩79.4b due beyond that. Offsetting these obligations, it had cash of ₩274.1b as well as receivables valued at ₩95.7b due within 12 months. So its liabilities total ₩275.3b more than the combination of its cash and short-term receivables.

Solus Advanced Materials has a market capitalization of ₩907.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Solus Advanced Materials's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Solus Advanced Materials had a loss before interest and tax, and actually shrunk its revenue by 6.9%, to ₩429b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Solus Advanced Materials produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩73b at the EBIT level. 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. However, it doesn't help that it burned through ₩285b of cash over the last year. So in short it's a really risky stock. 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. To that end, you should learn about the 2 warning signs we've spotted with Solus Advanced Materials (including 1 which can't be ignored) .

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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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.