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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, SG&G Corporation (KOSDAQ:040610) does carry debt. But is this debt a concern to shareholders?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
View our latest analysis for SG&G
What Is SG&G's Debt?
As you can see below, SG&G had ₩40.0b of debt at September 2020, down from ₩304.0b a year prior. However, it also had ₩5.70b in cash, and so its net debt is ₩34.3b.
How Healthy Is SG&G's Balance Sheet?
The latest balance sheet data shows that SG&G had liabilities of ₩27.5b due within a year, and liabilities of ₩27.4b falling due after that. On the other hand, it had cash of ₩5.70b and ₩4.93b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩44.2b.
This deficit is considerable relative to its market capitalization of ₩54.2b, so it does suggest shareholders should keep an eye on SG&G's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is SG&G's earnings that will influence how the balance sheet holds up in the future. 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.
In the last year SG&G had a loss before interest and tax, and actually shrunk its revenue by 72%, to ₩267b. That makes us nervous, to say the least.
Caveat Emptor
Not only did SG&G's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩7.7b. 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. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₩20b and the profit of ₩10b. So one might argue that there's still a chance it can get things on the right track. 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 3 warning signs for SG&G (1 is concerning!) 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. 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.
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About KOSDAQ:A040610
Good value with mediocre balance sheet.
