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. Importantly, SAMYOUNG M-Tek Co., Ltd (KOSDAQ:054540) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for SAMYOUNG M-Tek
What Is SAMYOUNG M-Tek's Debt?
The chart below, which you can click on for greater detail, shows that SAMYOUNG M-Tek had ₩29.1b in debt in September 2020; about the same as the year before. But on the other hand it also has ₩33.0b in cash, leading to a ₩3.92b net cash position.
A Look At SAMYOUNG M-Tek's Liabilities
According to the last reported balance sheet, SAMYOUNG M-Tek had liabilities of ₩37.4b due within 12 months, and liabilities of ₩2.24b due beyond 12 months. Offsetting this, it had ₩33.0b in cash and ₩13.9b in receivables that were due within 12 months. So it actually has ₩7.33b more liquid assets than total liabilities.
This short term liquidity is a sign that SAMYOUNG M-Tek could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, SAMYOUNG M-Tek boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that SAMYOUNG M-Tek has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing up
While it is always sensible to investigate a company's debt, in this case SAMYOUNG M-Tek has ₩3.92b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩7.0b, being 247% 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. However, not all investment risk resides within the balance sheet - far from it. For example - SAMYOUNG M-Tek has 2 warning signs we think you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you decide to trade SAMYOUNG M-Tek, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
About KOSDAQ:A054540
SAMYOUNG M-Tek
Manufactures and sells industrial materials in South Korea and internationally.
Flawless balance sheet and good value.
