These 4 Measures Indicate That Sejong Telecom (KOSDAQ:036630) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Sejong Telecom, Inc. (KOSDAQ:036630) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

See our latest analysis for Sejong Telecom

What Is Sejong Telecom's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Sejong Telecom had debt of ₩38.0b, up from ₩3.40b in one year. However, it does have ₩207.9b in cash offsetting this, leading to net cash of ₩169.9b.

How Strong Is Sejong Telecom's Balance Sheet?

We can see from the most recent balance sheet that Sejong Telecom had liabilities of ₩110.6b falling due within a year, and liabilities of ₩30.4b due beyond that. Offsetting these obligations, it had cash of ₩207.9b as well as receivables valued at ₩49.7b due within 12 months. So it actually has ₩116.6b more liquid assets than total liabilities.

This excess liquidity suggests that Sejong Telecom is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Sejong Telecom boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Sejong Telecom turned things around in the last 12 months, delivering and EBIT of ₩2.0b. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sejong Telecom will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sejong Telecom may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Sejong Telecom actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Sejong Telecom has ₩169.9b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 1,607% of that EBIT to free cash flow, bringing in ₩33b. So we don't think Sejong Telecom'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. We've identified 2 warning signs with Sejong Telecom , and understanding them should be part of your investment process.

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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