Here's Why Seoul Broadcasting System (KRX:034120) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Seoul Broadcasting System (KRX:034120) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Seoul Broadcasting System

What Is Seoul Broadcasting System's Net Debt?

The image below, which you can click on for greater detail, shows that Seoul Broadcasting System had debt of ₩279.5b at the end of December 2020, a reduction from ₩315.9b over a year. However, its balance sheet shows it holds ₩291.4b in cash, so it actually has ₩11.9b net cash.

How Strong Is Seoul Broadcasting System's Balance Sheet?

The latest balance sheet data shows that Seoul Broadcasting System had liabilities of ₩246.8b due within a year, and liabilities of ₩356.6b falling due after that. On the other hand, it had cash of ₩291.4b and ₩327.1b worth of receivables due within a year. So it actually has ₩15.1b more liquid assets than total liabilities.

This surplus suggests that Seoul Broadcasting System has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Seoul Broadcasting System boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Seoul Broadcasting System grew its EBIT by 554% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Seoul Broadcasting System 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Seoul Broadcasting System may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Seoul Broadcasting System reported free cash flow worth 19% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Seoul Broadcasting System has ₩11.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 554% year-on-year EBIT growth. So is Seoul Broadcasting System's debt a risk? It doesn't seem so to us. 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. Be aware that Seoul Broadcasting System is showing 1 warning sign in our investment analysis , 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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