We Think Seong An MaterialsLtd (KRX:011300) Has A Fair Chunk Of Debt

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. We can see that Seong An Materials Co.,Ltd (KRX:011300) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Seong An MaterialsLtd

What Is Seong An MaterialsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Seong An MaterialsLtd had ₩64.7b of debt, an increase on ₩52.9b, over one year. However, because it has a cash reserve of ₩6.28b, its net debt is less, at about ₩58.5b.

How Healthy Is Seong An MaterialsLtd's Balance Sheet?

We can see from the most recent balance sheet that Seong An MaterialsLtd had liabilities of ₩76.2b falling due within a year, and liabilities of ₩20.2b due beyond that. Offsetting this, it had ₩6.28b in cash and ₩8.50b in receivables that were due within 12 months. So it has liabilities totalling ₩81.7b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩99.9b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Seong An MaterialsLtd 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 Seong An MaterialsLtd had a loss before interest and tax, and actually shrunk its revenue by 51%, to ₩24b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Seong An MaterialsLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩11b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩8.4b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should be aware of the 3 warning signs we've spotted with Seong An MaterialsLtd .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.