Is SEWONCELLONTECH (KRX:091090) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SEWONCELLONTECH Co., Ltd. (KRX:091090) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for SEWONCELLONTECH

What Is SEWONCELLONTECH's Debt?

As you can see below, SEWONCELLONTECH had ₩99.7b of debt at December 2020, down from ₩110.0b a year prior. However, it does have ₩10.1b in cash offsetting this, leading to net debt of about ₩89.6b.

A Look At SEWONCELLONTECH's Liabilities

Zooming in on the latest balance sheet data, we can see that SEWONCELLONTECH had liabilities of ₩127.3b due within 12 months and liabilities of ₩27.4b due beyond that. On the other hand, it had cash of ₩10.1b and ₩32.6b worth of receivables due within a year. So its liabilities total ₩112.0b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩126.9b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 SEWONCELLONTECH 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.

In the last year SEWONCELLONTECH had a loss before interest and tax, and actually shrunk its revenue by 40%, to ₩110b. To be frank that doesn't bode well.

Caveat Emptor

Not only did SEWONCELLONTECH's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩6.0b 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. However, it doesn't help that it burned through ₩5.4b of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for SEWONCELLONTECH (of which 1 is significant!) 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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