Does Samsung Climate Control (KRX:006660) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Samsung Climate Control Co., Ltd. (KRX:006660) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Samsung Climate Control

What Is Samsung Climate Control's Debt?

The image below, which you can click on for greater detail, shows that Samsung Climate Control had debt of ₩6.88b at the end of September 2020, a reduction from ₩7.58b over a year. However, its balance sheet shows it holds ₩116.6b in cash, so it actually has ₩109.7b net cash.

How Strong Is Samsung Climate Control's Balance Sheet?

The latest balance sheet data shows that Samsung Climate Control had liabilities of ₩32.5b due within a year, and liabilities of ₩4.76b falling due after that. Offsetting this, it had ₩116.6b in cash and ₩9.56b in receivables that were due within 12 months. So it actually has ₩88.9b more liquid assets than total liabilities.

This excess liquidity is a great indication that Samsung Climate Control's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Samsung Climate Control has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Samsung Climate Control'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, Samsung Climate Control made a loss at the EBIT level, and saw its revenue drop to ₩63b, which is a fall of 20%. We would much prefer see growth.

So How Risky Is Samsung Climate Control?

While Samsung Climate Control lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩1.9b. 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. There's no doubt the next few years will be crucial to how the business matures. 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. We've identified 4 warning signs with Samsung Climate Control (at least 1 which is significant) , 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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