Is Sambo Motors (KOSDAQ:053700) 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 Sambo Motors Co., Ltd (KOSDAQ:053700) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sambo Motors

What Is Sambo Motors's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Sambo Motors had ₩365.9b of debt, an increase on ₩322.6b, over one year. However, it also had ₩142.2b in cash, and so its net debt is ₩223.6b.

How Strong Is Sambo Motors's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sambo Motors had liabilities of ₩475.9b due within 12 months and liabilities of ₩112.1b due beyond that. Offsetting this, it had ₩142.2b in cash and ₩124.2b in receivables that were due within 12 months. So its liabilities total ₩321.6b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₩103.5b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sambo Motors would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Sambo Motors'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.

Over 12 months, Sambo Motors made a loss at the EBIT level, and saw its revenue drop to ₩909b, which is a fall of 3.6%. That's not what we would hope to see.

Caveat Emptor

Importantly, Sambo Motors had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩15b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₩32b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Sambo Motors (of which 2 don't sit too well with us!) you should know about.

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. 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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