Is Solus Advanced Materials (KRX:336370) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Solus Advanced Materials Co., Ltd. (KRX:336370) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Solus Advanced Materials

How Much Debt Does Solus Advanced Materials Carry?

As you can see below, at the end of June 2024, Solus Advanced Materials had ₩483.7b of debt, up from ₩446.8b a year ago. Click the image for more detail. However, it also had ₩168.3b in cash, and so its net debt is ₩315.4b.

How Strong Is Solus Advanced Materials' Balance Sheet?

We can see from the most recent balance sheet that Solus Advanced Materials had liabilities of ₩544.3b falling due within a year, and liabilities of ₩151.5b due beyond that. Offsetting this, it had ₩168.3b in cash and ₩89.0b in receivables that were due within 12 months. So it has liabilities totalling ₩438.5b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Solus Advanced Materials has a market capitalization of ₩901.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Solus Advanced Materials wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to ₩486b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Solus Advanced Materials had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩55b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩282b 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Solus Advanced Materials (at least 2 which are significant) , 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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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.