Seohee Construction (KOSDAQ:035890) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Seohee Construction Co., Ltd. (KOSDAQ:035890) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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.

Check out our latest analysis for Seohee Construction

How Much Debt Does Seohee Construction Carry?

As you can see below, Seohee Construction had ₩144.9b of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₩353.2b in cash, so it actually has ₩208.3b net cash.

How Healthy Is Seohee Construction's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Seohee Construction had liabilities of ₩589.2b due within 12 months and liabilities of ₩126.9b due beyond that. Offsetting this, it had ₩353.2b in cash and ₩350.3b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Of course, Seohee Construction has a market capitalization of ₩265.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Seohee Construction also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Seohee Construction has boosted its EBIT by 37%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Seohee Construction 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Seohee 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. During the last three years, Seohee Construction produced sturdy free cash flow equating to 70% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Seohee Construction has ₩208.3b in net cash. And it impressed us with its EBIT growth of 37% over the last year. So is Seohee Construction's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Seohee Construction you should be aware of.

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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