Does Seegene (KOSDAQ:096530) Have A Healthy Balance Sheet?

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 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. Importantly, Seegene, Inc. (KOSDAQ:096530) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Seegene

What Is Seegene's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Seegene had ₩83.0b of debt, an increase on ₩7.73b, over one year. But it also has ₩209.4b in cash to offset that, meaning it has ₩126.4b net cash.

A Look At Seegene's Liabilities

According to the last reported balance sheet, Seegene had liabilities of ₩271.7b due within 12 months, and liabilities of ₩66.9b due beyond 12 months. Offsetting this, it had ₩209.4b in cash and ₩245.3b in receivables that were due within 12 months. So it actually has ₩116.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Seegene could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Seegene has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Seegene grew its EBIT by 1,803% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Seegene's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Seegene 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. Looking at the most recent three years, Seegene recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Seegene has ₩126.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 1,803% over the last year. So is Seegene'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 example, we've discovered 3 warning signs for Seegene (2 are concerning!) that you should be aware of before investing here.

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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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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