These 4 Measures Indicate That Samyung Trading (KRX:002810) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Samyung Trading Co., Ltd. (KRX:002810) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Samyung Trading

What Is Samyung Trading's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Samyung Trading had ₩31.5b of debt, an increase on none, over one year. But on the other hand it also has ₩197.6b in cash, leading to a ₩166.1b net cash position.

A Look At Samyung Trading's Liabilities

We can see from the most recent balance sheet that Samyung Trading had liabilities of ₩82.3b falling due within a year, and liabilities of ₩29.6b due beyond that. Offsetting this, it had ₩197.6b in cash and ₩81.6b in receivables that were due within 12 months. So it actually has ₩167.3b more liquid assets than total liabilities.

This excess liquidity is a great indication that Samyung Trading's balance sheet is almost as strong as Fort Knox. 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 152% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Samyung Trading's earnings that will influence how the balance sheet holds up in the future. 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 company can only pay off debt with cold hard cash, not accounting profits. While Samyung Trading 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. During the last three years, Samyung Trading produced sturdy free cash flow equating to 62% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Samyung Trading has net cash of ₩166.1b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 152% over the last year. When it comes to Samyung Trading's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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. To that end, you should be aware of the 1 warning sign we've spotted with Samyung Trading .

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.

If you decide to trade Samyung Trading, 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

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.