Samyung Trading (KRX:002810) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Samyung Trading Co., Ltd. (KRX:002810) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Samyung Trading

What Is Samyung Trading's Net Debt?

The image below, which you can click on for greater detail, shows that Samyung Trading had debt of ₩31.6b at the end of December 2020, a reduction from ₩33.2b over a year. But it also has ₩186.8b in cash to offset that, meaning it has ₩155.3b net cash.

How Healthy Is Samyung Trading's Balance Sheet?

The latest balance sheet data shows that Samyung Trading had liabilities of ₩82.5b due within a year, and liabilities of ₩29.5b falling due after that. Offsetting this, it had ₩186.8b in cash and ₩81.0b in receivables that were due within 12 months. So it actually has ₩155.8b more liquid assets than total liabilities.

This luscious liquidity implies that Samyung Trading's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Samyung Trading boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Samyung Trading grew its EBIT by 142% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Samyung Trading'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Samyung Trading 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. In the last three years, Samyung Trading's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Samyung Trading has ₩155.3b in net cash and a decent-looking balance sheet. And we liked the look of last year's 142% year-on-year EBIT growth. So is Samyung Trading's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Samyung Trading that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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