Does SEOWONINTECH.Co.Ltd (KOSDAQ:093920) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, SEOWONINTECH.Co.,Ltd (KOSDAQ:093920) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SEOWONINTECH.Co.Ltd

What Is SEOWONINTECH.Co.Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that SEOWONINTECH.Co.Ltd had ₩2.13b of debt in September 2020, down from ₩13.2b, one year before. However, it does have ₩98.1b in cash offsetting this, leading to net cash of ₩96.0b.

How Healthy Is SEOWONINTECH.Co.Ltd's Balance Sheet?

We can see from the most recent balance sheet that SEOWONINTECH.Co.Ltd had liabilities of ₩46.9b falling due within a year, and liabilities of ₩179.7m due beyond that. Offsetting this, it had ₩98.1b in cash and ₩41.2b in receivables that were due within 12 months. So it can boast ₩92.2b more liquid assets than total liabilities.

This surplus strongly suggests that SEOWONINTECH.Co.Ltd has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that SEOWONINTECH.Co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, SEOWONINTECH.Co.Ltd saw its EBIT drop by 5.8% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since SEOWONINTECH.Co.Ltd will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SEOWONINTECH.Co.Ltd 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. Happily for any shareholders, SEOWONINTECH.Co.Ltd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that SEOWONINTECH.Co.Ltd has net cash of ₩96.0b, as well as more liquid assets than liabilities. The cherry on top was that in converted 167% of that EBIT to free cash flow, bringing in ₩27b. So is SEOWONINTECH.Co.Ltd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for SEOWONINTECH.Co.Ltd that you should be aware of before investing here.

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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