Health Check: How Prudently Does Seoul Electronics & Telecom (KOSDAQ:027040) Use 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 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 Seoul Electronics & Telecom Co., Ltd. (KOSDAQ:027040) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

How Much Debt Does Seoul Electronics & Telecom Carry?

You can click the graphic below for the historical numbers, but it shows that Seoul Electronics & Telecom had ₩44.1b of debt in September 2024, down from ₩46.3b, one year before. However, because it has a cash reserve of ₩31.8b, its net debt is less, at about ₩12.3b.

How Healthy Is Seoul Electronics & Telecom's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Seoul Electronics & Telecom had liabilities of ₩59.2b due within 12 months and liabilities of ₩19.2b due beyond that. Offsetting this, it had ₩31.8b in cash and ₩11.3b in receivables that were due within 12 months. So it has liabilities totalling ₩35.4b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩15.2b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Seoul Electronics & Telecom would likely require a major re-capitalisation if it had to pay its creditors today. 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 Seoul Electronics & Telecom 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.

View our latest analysis for Seoul Electronics & Telecom

Over 12 months, Seoul Electronics & Telecom made a loss at the EBIT level, and saw its revenue drop to ₩34b, which is a fall of 11%. We would much prefer see growth.

Caveat Emptor

While Seoul Electronics & Telecom's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩2.6b. Considering that alongside the liabilities mentioned above make us nervous 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 ₩1.7b in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. For example Seoul Electronics & Telecom has 3 warning signs (and 2 which are concerning) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.