Samsung Climate Control (KRX:006660) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Samsung Climate Control Co., Ltd. (KRX:006660) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Samsung Climate Control

What Is Samsung Climate Control's Debt?

You can click the graphic below for the historical numbers, but it shows that Samsung Climate Control had ₩3.35b of debt in March 2024, down from ₩5.25b, one year before. But on the other hand it also has ₩194.1b in cash, leading to a ₩190.8b net cash position.

How Strong Is Samsung Climate Control's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Samsung Climate Control had liabilities of ₩36.7b due within 12 months and liabilities of ₩7.10b due beyond that. Offsetting this, it had ₩194.1b in cash and ₩20.7b in receivables that were due within 12 months. So it actually has ₩171.0b more liquid assets than total liabilities.

This luscious liquidity implies that Samsung Climate Control's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Samsung Climate Control boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Samsung Climate Control's saving grace is its low debt levels, because its EBIT has tanked 51% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Samsung Climate Control has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Samsung Climate Control actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Samsung Climate Control has ₩190.8b in net cash and a strong balance sheet. And it impressed us with free cash flow of ₩15b, being 223% of its EBIT. So is Samsung Climate Control's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Samsung Climate Control (of which 1 is concerning!) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com