Here's Why SAMYOUNG M-Tek (KOSDAQ:054540) Can Manage Its Debt Responsibly

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, SAMYOUNG M-Tek Co., Ltd (KOSDAQ:054540) does carry debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for SAMYOUNG M-Tek

What Is SAMYOUNG M-Tek's Debt?

As you can see below, SAMYOUNG M-Tek had ₩21.8b of debt at March 2024, down from ₩27.2b a year prior. However, it does have ₩18.9b in cash offsetting this, leading to net debt of about ₩2.93b.

A Look At SAMYOUNG M-Tek's Liabilities

We can see from the most recent balance sheet that SAMYOUNG M-Tek had liabilities of ₩43.7b falling due within a year, and liabilities of ₩1.09b due beyond that. On the other hand, it had cash of ₩18.9b and ₩16.3b worth of receivables due within a year. So its liabilities total ₩9.64b more than the combination of its cash and short-term receivables.

Given SAMYOUNG M-Tek has a market capitalization of ₩63.2b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

SAMYOUNG M-Tek has a low net debt to EBITDA ratio of only 0.32. And its EBIT easily covers its interest expense, being 294 times the size. So we're pretty relaxed about its super-conservative use of debt. Although SAMYOUNG M-Tek made a loss at the EBIT level, last year, it was also good to see that it generated ₩7.9b in EBIT over the last twelve months. 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 SAMYOUNG M-Tek 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the most recent year, SAMYOUNG M-Tek recorded free cash flow worth 68% 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.

Our View

The good news is that SAMYOUNG M-Tek's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its net debt to EBITDA also supports that impression! When we consider the range of factors above, it looks like SAMYOUNG M-Tek is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. We've identified 4 warning signs with SAMYOUNG M-Tek (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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. 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.

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