We Think SUN KWANGLtd (KOSDAQ:003100) Can Stay On Top Of Its 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, SUN KWANG CO.,Ltd. (KOSDAQ:003100) does carry debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

What Is SUN KWANGLtd's Net Debt?

As you can see below, SUN KWANGLtd had ₩38.7b of debt at March 2025, down from ₩70.9b a year prior. However, its balance sheet shows it holds ₩49.4b in cash, so it actually has ₩10.7b net cash.

How Healthy Is SUN KWANGLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SUN KWANGLtd had liabilities of ₩52.5b due within 12 months and liabilities of ₩185.6b due beyond that. On the other hand, it had cash of ₩49.4b and ₩24.8b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩163.8b.

When you consider that this deficiency exceeds the company's ₩128.6b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that SUN KWANGLtd has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

See our latest analysis for SUN KWANGLtd

Notably SUN KWANGLtd's EBIT was pretty flat over the last year. Ideally it can diminish its debt load by kick-starting earnings growth. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SUN KWANGLtd 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 SUN KWANGLtd 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, SUN KWANGLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While SUN KWANGLtd does have more liabilities than liquid assets, it also has net cash of ₩10.7b. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in ₩24b. So we are not troubled with SUN KWANGLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with SUN KWANGLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.