Is Sejong Industrial (KRX:033530) Using Too Much Debt?

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.' 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 can see that Sejong Industrial Co., Ltd. (KRX:033530) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Sejong Industrial

What Is Sejong Industrial's Debt?

As you can see below, at the end of September 2020, Sejong Industrial had ₩310.3b of debt, up from ₩261.4b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩151.3b, its net debt is less, at about ₩159.1b.

How Strong Is Sejong Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sejong Industrial had liabilities of ₩657.4b due within 12 months and liabilities of ₩75.8b due beyond that. On the other hand, it had cash of ₩151.3b and ₩282.7b worth of receivables due within a year. So it has liabilities totalling ₩299.1b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₩252.5b, we think shareholders really should watch Sejong Industrial's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sejong Industrial'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.

Over 12 months, Sejong Industrial made a loss at the EBIT level, and saw its revenue drop to ₩1.1t, which is a fall of 4.3%. That's not what we would hope to see.

Caveat Emptor

Importantly, Sejong Industrial had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩6.9b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩48b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Sejong Industrial (2 are a bit concerning!) 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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