Is SAMYOUNG M-Tek (KOSDAQ:054540) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies SAMYOUNG M-Tek Co., Ltd (KOSDAQ:054540) makes use of debt. But the real question is whether this debt is making the company risky.

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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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is SAMYOUNG M-Tek's Net Debt?

As you can see below, SAMYOUNG M-Tek had ₩19.8b of debt at September 2024, down from ₩27.8b a year prior. But it also has ₩24.0b in cash to offset that, meaning it has ₩4.23b net cash.

How Strong Is SAMYOUNG M-Tek's Balance Sheet?

According to the last reported balance sheet, SAMYOUNG M-Tek had liabilities of ₩42.2b due within 12 months, and liabilities of ₩592.2m due beyond 12 months. Offsetting this, it had ₩24.0b in cash and ₩14.9b in receivables that were due within 12 months. So its liabilities total ₩3.85b more than the combination of its cash and short-term receivables.

Since publicly traded SAMYOUNG M-Tek shares are worth a total of ₩56.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, SAMYOUNG M-Tek boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for SAMYOUNG M-Tek

Also positive, SAMYOUNG M-Tek grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. 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. While SAMYOUNG M-Tek 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, SAMYOUNG M-Tek actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about SAMYOUNG M-Tek's liabilities, but we can be reassured by the fact it has has net cash of ₩4.23b. And it impressed us with free cash flow of ₩13b, being 145% of its EBIT. So is SAMYOUNG M-Tek's debt a risk? It doesn't seem so to us. 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. For example SAMYOUNG M-Tek has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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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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.