Seoul Electronics & Telecom (KOSDAQ:027040) Is Carrying A Fair Bit Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Seoul Electronics & Telecom Co., Ltd. (KOSDAQ:027040) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Seoul Electronics & Telecom

What Is Seoul Electronics & Telecom's Net Debt?

As you can see below, at the end of December 2020, Seoul Electronics & Telecom had ₩24.5b of debt, up from ₩22.2b a year ago. Click the image for more detail. On the flip side, it has ₩8.88b in cash leading to net debt of about ₩15.6b.

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

We can see from the most recent balance sheet that Seoul Electronics & Telecom had liabilities of ₩32.6b falling due within a year, and liabilities of ₩17.6b due beyond that. On the other hand, it had cash of ₩8.88b and ₩11.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩30.1b.

While this might seem like a lot, it is not so bad since Seoul Electronics & Telecom has a market capitalization of ₩64.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Seoul Electronics & Telecom 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.

Over 12 months, Seoul Electronics & Telecom made a loss at the EBIT level, and saw its revenue drop to ₩60b, which is a fall of 8.8%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Seoul Electronics & Telecom produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩1.7b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₩3.4b into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Seoul Electronics & Telecom (1 is potentially serious!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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