Is SEOHAN Const. & Eng.co.Ltd (KOSDAQ:011370) A Risky Investment?

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. Importantly, SEOHAN Const. & Eng.co.,Ltd (KOSDAQ:011370) does carry debt. But the more important question is: how much risk is that debt creating?

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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for SEOHAN Const. & Eng.co.Ltd

How Much Debt Does SEOHAN Const. & Eng.co.Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that SEOHAN Const. & Eng.co.Ltd had ₩48.7b of debt in June 2020, down from ₩55.1b, one year before. However, its balance sheet shows it holds ₩78.8b in cash, so it actually has ₩30.1b net cash.

How Healthy Is SEOHAN Const. & Eng.co.Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SEOHAN Const. & Eng.co.Ltd had liabilities of ₩140.4b due within 12 months and liabilities of ₩41.7b due beyond that. Offsetting these obligations, it had cash of ₩78.8b as well as receivables valued at ₩148.0b due within 12 months. So it actually has ₩44.6b more liquid assets than total liabilities.

This surplus suggests that SEOHAN Const. & Eng.co.Ltd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that SEOHAN Const. & Eng.co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact SEOHAN Const. & Eng.co.Ltd's saving grace is its low debt levels, because its EBIT has tanked 82% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since SEOHAN Const. & Eng.co.Ltd will need earnings to service that debt. 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 company can only pay off debt with cold hard cash, not accounting profits. While SEOHAN Const. & Eng.co.Ltd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, SEOHAN Const. & Eng.co.Ltd created free cash flow amounting to 9.4% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case SEOHAN Const. & Eng.co.Ltd has ₩30.1b in net cash and a decent-looking balance sheet. So we are not troubled with SEOHAN Const. & Eng.co.Ltd's debt use. 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for SEOHAN Const. & Eng.co.Ltd (of which 1 is a bit unpleasant!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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