Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Saedong Co.,Ltd. (KOSDAQ:053060) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 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 SaedongLtd
How Much Debt Does SaedongLtd Carry?
You can click the graphic below for the historical numbers, but it shows that SaedongLtd had ₩47.7b of debt in December 2020, down from ₩55.5b, one year before. However, because it has a cash reserve of ₩6.06b, its net debt is less, at about ₩41.7b.
How Strong Is SaedongLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that SaedongLtd had liabilities of ₩55.6b due within 12 months and liabilities of ₩37.6b due beyond that. Offsetting these obligations, it had cash of ₩6.06b as well as receivables valued at ₩11.0b due within 12 months. So its liabilities total ₩76.1b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the ₩31.5b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, SaedongLtd would likely require a major re-capitalisation if it had to pay its creditors today. 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 SaedongLtd 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.
In the last year SaedongLtd had a loss before interest and tax, and actually shrunk its revenue by 19%, to ₩119b. We would much prefer see growth.
Caveat Emptor
Not only did SaedongLtd'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 ₩5.0b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₩8.8b didn't encourage us either; we'd like to see a profit. And until that time we think this is a 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. For example SaedongLtd has 4 warning signs (and 1 which can't be ignored) we think you should know about.
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. 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:A053060
SaedongLtd
Manufactures and sells automotive components and systems in South Korea and internationally.
Mediocre balance sheet and slightly overvalued.
