These 4 Measures Indicate That Seoul Broadcasting System (KRX:034120) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Seoul Broadcasting System (KRX:034120) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Seoul Broadcasting System

What Is Seoul Broadcasting System's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Seoul Broadcasting System had debt of ₩368.1b, up from ₩323.3b in one year. But on the other hand it also has ₩374.0b in cash, leading to a ₩5.88b net cash position.

How Healthy Is Seoul Broadcasting System's Balance Sheet?

According to the last reported balance sheet, Seoul Broadcasting System had liabilities of ₩301.8b due within 12 months, and liabilities of ₩349.9b due beyond 12 months. Offsetting this, it had ₩374.0b in cash and ₩291.3b in receivables that were due within 12 months. So it actually has ₩13.6b 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!

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 ₩63b. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Seoul Broadcasting System's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Seoul Broadcasting System has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Seoul Broadcasting System burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Seoul Broadcasting System has net cash of ₩5.88b, as well as more liquid assets than liabilities. So we don't have any problem with Seoul Broadcasting System's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Seoul Broadcasting System (including 1 which is concerning) .

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.

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