Is Se Gyung Hi TechLtd (KOSDAQ:148150) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Se Gyung Hi Tech Co.,Ltd (KOSDAQ:148150) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Se Gyung Hi TechLtd

What Is Se Gyung Hi TechLtd's Net 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, it does have ₩35.4b in cash offsetting this, leading to net debt of about ₩19.4b.

How Healthy Is Se Gyung Hi TechLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Se Gyung Hi TechLtd had liabilities of ₩60.3b due within 12 months and liabilities of ₩39.7b due beyond that. Offsetting these obligations, it had cash of ₩35.4b as well as receivables valued at ₩37.5b due within 12 months. So it has liabilities totalling ₩27.0b more than its cash and near-term receivables, combined.

Of course, Se Gyung Hi TechLtd has a market capitalization of ₩260.8b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Se Gyung Hi TechLtd made a loss at the EBIT level, and saw its revenue drop to ₩216b, which is a fall of 30%. To be frank that doesn't bode well.

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). Indeed, it lost ₩11b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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. 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. For example, we've discovered 3 warning signs for Se Gyung Hi TechLtd (1 is potentially serious!) 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.

When trading Se Gyung Hi TechLtd or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.