Is Sebang Global Battery (KRX:004490) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Sebang Global Battery Co., Ltd. (KRX:004490) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Sebang Global Battery

How Much Debt Does Sebang Global Battery Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Sebang Global Battery had debt of ₩296.8b, up from ₩139.9b in one year. However, it does have ₩610.2b in cash offsetting this, leading to net cash of ₩313.4b.

How Healthy Is Sebang Global Battery's Balance Sheet?

According to the last reported balance sheet, Sebang Global Battery had liabilities of ₩429.7b due within 12 months, and liabilities of ₩32.6b due beyond 12 months. Offsetting this, it had ₩610.2b in cash and ₩234.5b in receivables that were due within 12 months. So it can boast ₩382.4b more liquid assets than total liabilities.

This surplus liquidity suggests that Sebang Global Battery's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Sebang Global Battery boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Sebang Global Battery if management cannot prevent a repeat of the 34% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sebang Global Battery 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. Sebang Global Battery may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Sebang Global Battery recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Sebang Global Battery has ₩313.4b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩104b, being 87% of its EBIT. So we don't think Sebang Global Battery's use of debt is risky. 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. For example, we've discovered 1 warning sign for Sebang Global Battery that you should be aware of before investing here.

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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