Seoul Electronics & Telecom (KOSDAQ:027040) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Seoul Electronics & Telecom Co., Ltd. (KOSDAQ:027040) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Seoul Electronics & Telecom

How Much Debt Does Seoul Electronics & Telecom Carry?

The image below, which you can click on for greater detail, shows that Seoul Electronics & Telecom had debt of ₩44.1b at the end of September 2024, a reduction from ₩46.3b over a year. On the flip side, it has ₩31.8b in cash leading to net debt of about ₩12.3b.

A Look At Seoul Electronics & Telecom's Liabilities

The latest balance sheet data shows that Seoul Electronics & Telecom had liabilities of ₩59.2b due within a year, and liabilities of ₩19.2b falling due after that. On the other hand, it had cash of ₩31.8b and ₩11.3b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩35.4b.

The deficiency here weighs heavily on the ₩14.1b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Seoul Electronics & Telecom would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Seoul Electronics & Telecom'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, 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

Not only did Seoul Electronics & Telecom's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩2.6b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₩1.7b in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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, we've discovered 2 warning signs for Seoul Electronics & Telecom that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.