Is Samsung Heavy Industries (KRX:010140) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Samsung Heavy Industries Co., Ltd. (KRX:010140) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Samsung Heavy Industries

How Much Debt Does Samsung Heavy Industries Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Samsung Heavy Industries had ₩4.82t of debt, an increase on ₩3.81t, over one year. However, it does have ₩1.58t in cash offsetting this, leading to net debt of about ₩3.23t.

A Look At Samsung Heavy Industries' Liabilities

The latest balance sheet data shows that Samsung Heavy Industries had liabilities of ₩7.53t due within a year, and liabilities of ₩1.67t falling due after that. On the other hand, it had cash of ₩1.58t and ₩294.5b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩7.33t.

The deficiency here weighs heavily on the ₩4.50t company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Samsung Heavy Industries would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Samsung Heavy Industries can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Samsung Heavy Industries made a loss at the EBIT level, and saw its revenue drop to ₩6.9t, which is a fall of 6.7%. That's not what we would hope to see.

Caveat Emptor

Importantly, Samsung Heavy Industries had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩1.1t. When we look at that alongside the significant liabilities, we're not particularly confident 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 ₩342b over the last twelve months. So suffice it to say we consider the stock to be risky. For riskier companies like Samsung Heavy Industries I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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