Here's Why SeA Mechanics (KOSDAQ:396300) Can Afford Some Debt

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.' 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, SeA Mechanics Co., Ltd (KOSDAQ:396300) does carry debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is SeA Mechanics's Net Debt?

As you can see below, at the end of June 2025, SeA Mechanics had ₩46.5b of debt, up from ₩22.8b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩35.1b, its net debt is less, at about ₩11.4b.

How Strong Is SeA Mechanics' Balance Sheet?

We can see from the most recent balance sheet that SeA Mechanics had liabilities of ₩59.5b falling due within a year, and liabilities of ₩405.2m due beyond that. On the other hand, it had cash of ₩35.1b and ₩8.97b worth of receivables due within a year. So it has liabilities totalling ₩15.8b more than its cash and near-term receivables, combined.

Of course, SeA Mechanics has a market capitalization of ₩87.0b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since SeA Mechanics 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.

View our latest analysis for SeA Mechanics

Over 12 months, SeA Mechanics made a loss at the EBIT level, and saw its revenue drop to ₩84b, which is a fall of 10%. We would much prefer see growth.

Caveat Emptor

While SeA Mechanics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩5.2b at the EBIT level. 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. Another cause for caution is that is bled ₩1.4b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. To that end, you should learn about the 3 warning signs we've spotted with SeA Mechanics (including 1 which can't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.