Sebang Global Battery (KRX:004490) Has A Rock Solid Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Sebang Global Battery Co., Ltd. (KRX:004490) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. 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 Sebang Global Battery

How Much Debt Does Sebang Global Battery Carry?

As you can see below, at the end of September 2020, Sebang Global Battery had ₩296.8b of debt, up from ₩139.9b a year ago. Click the image for more detail. However, it does have ₩610.2b in cash offsetting this, leading to net cash of ₩313.4b.

How Strong 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 these obligations, it had cash of ₩610.2b as well as receivables valued at ₩234.5b 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. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Sebang Global Battery has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Sebang Global Battery's saving grace is its low debt levels, because its EBIT has tanked 34% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sebang Global Battery'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 positions it well to pay down debt if desirable to do so.

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. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in ₩104b. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Sebang Global Battery , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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