We Think Solus Advanced Materials (KRX:336370) Has A Fair Chunk Of 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. Importantly, Solus Advanced Materials Co., Ltd. (KRX:336370) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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

What Is Solus Advanced Materials's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Solus Advanced Materials had ₩465.4b of debt, an increase on ₩400.1b, over one year. However, it does have ₩264.7b in cash offsetting this, leading to net debt of about ₩200.7b.

A Look At Solus Advanced Materials' Liabilities

Zooming in on the latest balance sheet data, we can see that Solus Advanced Materials had liabilities of ₩608.5b due within 12 months and liabilities of ₩120.9b due beyond that. Offsetting these obligations, it had cash of ₩264.7b as well as receivables valued at ₩94.9b due within 12 months. So it has liabilities totalling ₩369.7b more than its cash and near-term receivables, combined.

Solus Advanced Materials has a market capitalization of ₩1.25t, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Solus Advanced Materials reported revenue of ₩438b, which is a gain of 4.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Solus Advanced Materials produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩68b 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 ₩220b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Solus Advanced Materials that you should be aware of before investing here.

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.