Is SeAH Besteel (KRX:001430) Using Debt Sensibly?

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.' 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 note that SeAH Besteel Corporation (KRX:001430) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 SeAH Besteel

How Much Debt Does SeAH Besteel Carry?

You can click the graphic below for the historical numbers, but it shows that SeAH Besteel had ₩827.7b of debt in December 2020, down from ₩976.2b, one year before. However, because it has a cash reserve of ₩268.7b, its net debt is less, at about ₩559.0b.

How Healthy Is SeAH Besteel's Balance Sheet?

According to the last reported balance sheet, SeAH Besteel had liabilities of ₩756.9b due within 12 months, and liabilities of ₩809.8b due beyond 12 months. Offsetting this, it had ₩268.7b in cash and ₩344.9b in receivables that were due within 12 months. So it has liabilities totalling ₩953.1b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩966.9b, so it does suggest shareholders should keep an eye on SeAH Besteel's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe 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 SeAH Besteel can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year SeAH Besteel had a loss before interest and tax, and actually shrunk its revenue by 14%, to ₩2.5t. We would much prefer see growth.

Caveat Emptor

While SeAH Besteel's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩43b 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₩246b into a profit. In the meantime, we consider the stock very 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. We've identified 3 warning signs with SeAH Besteel , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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