Is Sambu Engineering & Construction (KRX:001470) Using Debt In A Risky Way?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Sambu Engineering & Construction Co., Ltd (KRX:001470) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Sambu Engineering & Construction

What Is Sambu Engineering & Construction's Debt?

You can click the graphic below for the historical numbers, but it shows that Sambu Engineering & Construction had ₩175.2b of debt in June 2024, down from ₩213.7b, one year before. However, it does have ₩55.4b in cash offsetting this, leading to net debt of about ₩119.8b.

How Healthy Is Sambu Engineering & Construction's Balance Sheet?

The latest balance sheet data shows that Sambu Engineering & Construction had liabilities of ₩346.4b due within a year, and liabilities of ₩36.6b falling due after that. Offsetting this, it had ₩55.4b in cash and ₩86.8b in receivables that were due within 12 months. So its liabilities total ₩240.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩136.1b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Sambu Engineering & Construction would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sambu Engineering & Construction's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Sambu Engineering & Construction had a loss before interest and tax, and actually shrunk its revenue by 22%, to ₩447b. That makes us nervous, to say the least.

Caveat Emptor

While Sambu Engineering & Construction's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩128b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₩41b over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Sambu Engineering & Construction (2 are significant) 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.

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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.