The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Seung Il Corporation (KOSDAQ:049830) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Seung Il
What Is Seung Il's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Seung Il had ₩7.00b of debt in September 2020, down from ₩10.0b, one year before. But on the other hand it also has ₩24.1b in cash, leading to a ₩17.1b net cash position.
How Healthy Is Seung Il's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Seung Il had liabilities of ₩30.5b due within 12 months and liabilities of ₩5.32b due beyond that. On the other hand, it had cash of ₩24.1b and ₩24.8b worth of receivables due within a year. So it can boast ₩13.1b more liquid assets than total liabilities.
It's good to see that Seung Il has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Seung Il boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Seung Il's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Seung Il had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to ₩132b. We would much prefer see growth.
So How Risky Is Seung Il?
Although Seung Il had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩881m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Seung Il is showing 2 warning signs in our investment analysis , and 1 of those is significant...
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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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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About KOSDAQ:A049830
Flawless balance sheet with proven track record.
