Does Sejong Telecom (KOSDAQ:036630) 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.' 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. As with many other companies Sejong Telecom, Inc. (KOSDAQ:036630) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Sejong Telecom

How Much Debt Does Sejong Telecom Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Sejong Telecom had debt of ₩38.5b, up from ₩3.53b in one year. But it also has ₩197.9b in cash to offset that, meaning it has ₩159.4b net cash.

How Healthy Is Sejong Telecom's Balance Sheet?

According to the last reported balance sheet, Sejong Telecom had liabilities of ₩109.2b due within 12 months, and liabilities of ₩29.5b due beyond 12 months. Offsetting this, it had ₩197.9b in cash and ₩56.3b in receivables that were due within 12 months. So it actually has ₩115.5b more liquid assets than total liabilities.

This excess liquidity is a great indication that Sejong Telecom's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, Sejong Telecom boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sejong Telecom 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.

In the last year Sejong Telecom wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to ₩284b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Sejong Telecom?

While Sejong Telecom lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩2.0b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Sejong Telecom that you should be aware of before investing here.

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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