Is Se Gyung Hi TechLtd (KOSDAQ:148150) A Risky Investment?

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.' 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 Se Gyung Hi Tech Co.,Ltd (KOSDAQ:148150) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Se Gyung Hi TechLtd

What Is Se Gyung Hi TechLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Se Gyung Hi TechLtd had debt of ₩54.8b, up from ₩11.8b in one year. However, because it has a cash reserve of ₩35.4b, its net debt is less, at about ₩19.4b.

A Look At Se Gyung Hi TechLtd's Liabilities

We can see from the most recent balance sheet that Se Gyung Hi TechLtd had liabilities of ₩60.3b falling due within a year, and liabilities of ₩39.7b due beyond that. Offsetting this, it had ₩35.4b in cash and ₩37.5b in receivables that were due within 12 months. So it has liabilities totalling ₩27.0b more than its cash and near-term receivables, combined.

Since publicly traded Se Gyung Hi TechLtd shares are worth a total of ₩246.8b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Se Gyung Hi TechLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Se Gyung Hi TechLtd had a loss before interest and tax, and actually shrunk its revenue by 30%, to ₩216b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Se Gyung Hi TechLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩11b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩58b of cash over the last year. So suffice it to say we consider the stock very risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Se Gyung Hi TechLtd (of which 1 doesn't sit too well with us!) you should know about.

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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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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