Sejin Heavy Industries (KRX:075580) Is Carrying A Fair Bit Of 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 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. We can see that Sejin Heavy Industries Co., Ltd. (KRX:075580) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sejin Heavy Industries

What Is Sejin Heavy Industries's Debt?

As you can see below, at the end of September 2020, Sejin Heavy Industries had ₩215.1b of debt, up from ₩201.6b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩24.9b, its net debt is less, at about ₩190.2b.

How Healthy Is Sejin Heavy Industries' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sejin Heavy Industries had liabilities of ₩194.3b due within 12 months and liabilities of ₩67.7b due beyond that. On the other hand, it had cash of ₩24.9b and ₩47.7b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩189.4b.

This deficit isn't so bad because Sejin Heavy Industries is worth ₩330.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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 ultimately the future profitability of the business will decide if Sejin Heavy Industries can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Sejin Heavy Industries made a loss at the EBIT level, and saw its revenue drop to ₩280b, which is a fall of 4.5%. We would much prefer see growth.

Caveat Emptor

Importantly, Sejin Heavy Industries had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩3.4b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of ₩7.8b and a profit of ₩944m. So one might argue that there's still a chance it can get things on the right track. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Sejin Heavy Industries has 5 warning signs (and 2 which don't sit too well with us) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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