These 4 Measures Indicate That SIMPAC (KRX:009160) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies SIMPAC Inc. (KRX:009160) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for SIMPAC

What Is SIMPAC's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 SIMPAC had ₩324.1b of debt, an increase on ₩192.3b, over one year. However, its balance sheet shows it holds ₩355.8b in cash, so it actually has ₩31.8b net cash.

How Strong Is SIMPAC's Balance Sheet?

According to the last reported balance sheet, SIMPAC had liabilities of ₩457.3b due within 12 months, and liabilities of ₩20.5b due beyond 12 months. Offsetting this, it had ₩355.8b in cash and ₩87.0b in receivables that were due within 12 months. So it has liabilities totalling ₩35.0b more than its cash and near-term receivables, combined.

Of course, SIMPAC has a market capitalization of ₩256.7b, so these liabilities are probably manageable. 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, SIMPAC boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact SIMPAC's saving grace is its low debt levels, because its EBIT has tanked 81% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 SIMPAC 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 SIMPAC 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. Looking at the most recent three years, SIMPAC recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although SIMPAC's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩31.8b. So we are not troubled with SIMPAC's debt use. 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 SIMPAC has 3 warning signs (and 1 which is significant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.