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 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. As with many other companies Seoul Broadcasting System (KRX:034120) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Seoul Broadcasting System’s Net Debt?
As you can see below, at the end of June 2020, Seoul Broadcasting System had ₩295.3b of debt, up from ₩236.3b a year ago. Click the image for more detail. But on the other hand it also has ₩314.8b in cash, leading to a ₩19.5b net cash position.
How Healthy Is Seoul Broadcasting System’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Seoul Broadcasting System had liabilities of ₩297.9b due within 12 months and liabilities of ₩273.4b due beyond that. On the other hand, it had cash of ₩314.8b and ₩258.8b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
This state of affairs indicates that Seoul Broadcasting System’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it’s very unlikely that the ₩254.7b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Seoul Broadcasting System boasts net cash, so it’s fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Seoul Broadcasting System turned things around in the last 12 months, delivering and EBIT of ₩31b. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Seoul Broadcasting System 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 year, Seoul Broadcasting System actually produced more free cash flow than EBIT. There’s nothing better than incoming cash when it comes to staying in your lenders’ good graces.
While we empathize with investors who find debt concerning, you should keep in mind that Seoul Broadcasting System has net cash of ₩19.5b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩36b, being 118% of its EBIT. 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. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 3 warning signs for Seoul Broadcasting System (1 is significant) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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