Samho Development (KRX:010960) Seems To Use Debt Quite Sensibly

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.' 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. We note that Samho Development Co., LTD (KRX:010960) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Samho Development

What Is Samho Development's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Samho Development had ₩8.50b of debt, an increase on ₩7.70b, over one year. But it also has ₩96.5b in cash to offset that, meaning it has ₩88.0b net cash.

How Strong Is Samho Development's Balance Sheet?

The latest balance sheet data shows that Samho Development had liabilities of ₩91.6b due within a year, and liabilities of ₩12.0b falling due after that. Offsetting these obligations, it had cash of ₩96.5b as well as receivables valued at ₩61.0b due within 12 months. So it actually has ₩53.8b more liquid assets than total liabilities.

This surplus strongly suggests that Samho Development has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Samho Development has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Samho Development's saving grace is its low debt levels, because its EBIT has tanked 21% 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 Samho Development will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Samho Development 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. In the last three years, Samho Development's free cash flow amounted to 24% 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 Samho Development has ₩88.0b in net cash and a decent-looking balance sheet. So we are not troubled with Samho Development's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Samho Development 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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