We Think SEOHAN Const. & Eng.co.Ltd (KOSDAQ:011370) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that SEOHAN Const. & Eng.co.,Ltd (KOSDAQ:011370) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 SEOHAN Const. & Eng.co.Ltd

What Is SEOHAN Const. & Eng.co.Ltd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that SEOHAN Const. & Eng.co.Ltd had ₩37.3b of debt in September 2020, down from ₩43.9b, one year before. However, it does have ₩141.0b in cash offsetting this, leading to net cash of ₩103.7b.

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 ₩152.9b due within 12 months and liabilities of ₩40.4b due beyond that. On the other hand, it had cash of ₩141.0b and ₩83.5b worth of receivables due within a year. So it actually has ₩31.2b 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. Given it has easily adequate short term liquidity, we don't think it will have any 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.

On top of that, SEOHAN Const. & Eng.co.Ltd grew its EBIT by 65% over the last twelve months, and that growth will make it easier to handle its debt. 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 SEOHAN Const. & Eng.co.Ltd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. SEOHAN Const. & Eng.co.Ltd 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, SEOHAN Const. & Eng.co.Ltd recorded free cash flow worth a fulsome 88% 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 we empathize with investors who find debt concerning, you should keep in mind that SEOHAN Const. & Eng.co.Ltd has net cash of ₩103.7b, as well as more liquid assets than liabilities. The cherry on top was that in converted 88% of that EBIT to free cash flow, bringing in ₩83b. When it comes to SEOHAN Const. & Eng.co.Ltd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. To that end, you should be aware of the 1 warning sign we've spotted with SEOHAN Const. & Eng.co.Ltd .

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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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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