SEOWONINTECH.Co.Ltd (KOSDAQ:093920) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that SEOWONINTECH.Co.,Ltd (KOSDAQ:093920) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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 SEOWONINTECH.Co.Ltd

How Much Debt Does SEOWONINTECH.Co.Ltd Carry?

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. But it also has ₩98.1b in cash to offset that, meaning it has ₩96.0b net cash.

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

According to the last reported balance sheet, SEOWONINTECH.Co.Ltd had liabilities of ₩46.9b due within 12 months, and liabilities of ₩179.7m due beyond 12 months. Offsetting these obligations, it had cash of ₩98.1b as well as receivables valued at ₩41.2b due within 12 months. So it actually has ₩92.2b more liquid assets than total liabilities.

This surplus liquidity suggests that SEOWONINTECH.Co.Ltd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 we don't think SEOWONINTECH.Co.Ltd's use of debt is risky. 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 SEOWONINTECH.Co.Ltd is showing 1 warning sign in our investment analysis , you should know about...

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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