Does Sebo Manufacturing Engineering & Construction (KOSDAQ:011560) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Sebo Manufacturing, Engineering & Construction Corp. (KOSDAQ:011560) makes use of debt. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sebo Manufacturing Engineering & Construction

What Is Sebo Manufacturing Engineering & Construction's Net Debt?

The image below, which you can click on for greater detail, shows that Sebo Manufacturing Engineering & Construction had debt of ₩33.0b at the end of March 2024, a reduction from ₩53.0b over a year. However, its balance sheet shows it holds ₩112.7b in cash, so it actually has ₩79.7b net cash.

A Look At Sebo Manufacturing Engineering & Construction's Liabilities

We can see from the most recent balance sheet that Sebo Manufacturing Engineering & Construction had liabilities of ₩229.5b falling due within a year, and liabilities of ₩12.3b due beyond that. Offsetting this, it had ₩112.7b in cash and ₩233.5b in receivables that were due within 12 months. So it actually has ₩104.3b more liquid assets than total liabilities.

This surplus liquidity suggests that Sebo Manufacturing Engineering & Construction's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Sebo Manufacturing Engineering & Construction has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Sebo Manufacturing Engineering & Construction grew its EBIT by 9.6% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sebo Manufacturing Engineering & Construction 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sebo Manufacturing Engineering & Construction 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. Happily for any shareholders, Sebo Manufacturing Engineering & Construction actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Sebo Manufacturing Engineering & Construction has net cash of ₩79.7b, as well as more liquid assets than liabilities. The cherry on top was that in converted 159% of that EBIT to free cash flow, bringing in ₩100b. The bottom line is that we do not find Sebo Manufacturing Engineering & Construction's debt levels at all concerning. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Sebo Manufacturing Engineering & Construction that you should be aware of before investing here.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.