Sammok S-FormLtd (KOSDAQ:018310) Has A Rock Solid 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, Sammok S-Form Co.,Ltd (KOSDAQ:018310) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sammok S-FormLtd

What Is Sammok S-FormLtd's Net Debt?

As you can see below, Sammok S-FormLtd had ₩13.0b of debt at March 2024, down from ₩18.4b a year prior. But it also has ₩201.3b in cash to offset that, meaning it has ₩188.4b net cash.

How Healthy Is Sammok S-FormLtd's Balance Sheet?

The latest balance sheet data shows that Sammok S-FormLtd had liabilities of ₩153.4b due within a year, and liabilities of ₩25.7b falling due after that. Offsetting these obligations, it had cash of ₩201.3b as well as receivables valued at ₩20.0 due within 12 months. So it actually has ₩22.2b more liquid assets than total liabilities.

This surplus suggests that Sammok S-FormLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sammok S-FormLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Sammok S-FormLtd grew its EBIT by 116% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sammok S-FormLtd will need earnings to service that debt. 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. Sammok S-FormLtd 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. Over the most recent three years, Sammok S-FormLtd recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sammok S-FormLtd has ₩188.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 116% over the last year. So we don't think Sammok S-FormLtd'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Sammok S-FormLtd you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.