Is Sebang (KRX:004360) Using Too Much Debt?

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 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. We note that Sebang Co., Ltd (KRX:004360) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sebang

What Is Sebang's Debt?

As you can see below, at the end of September 2020, Sebang had ₩73.1b of debt, up from ₩39.0b a year ago. Click the image for more detail. However, it does have ₩123.1b in cash offsetting this, leading to net cash of ₩49.9b.

How Healthy Is Sebang's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sebang had liabilities of ₩192.9b due within 12 months and liabilities of ₩125.8b due beyond that. Offsetting these obligations, it had cash of ₩123.1b as well as receivables valued at ₩120.7b due within 12 months. So it has liabilities totalling ₩75.0b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Sebang is worth ₩273.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Sebang boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Sebang grew its EBIT at 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sebang's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sebang 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. During the last three years, Sebang generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While Sebang does have more liabilities than liquid assets, it also has net cash of ₩49.9b. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in ₩33b. So we don't think Sebang'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. For example, we've discovered 2 warning signs for Sebang (1 shouldn't be ignored!) 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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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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