Does Samsung E&A (KRX:028050) Have A Healthy Balance Sheet?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Samsung E&A Co., Ltd. (KRX:028050) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Samsung E&A

How Much Debt Does Samsung E&A Carry?

You can click the graphic below for the historical numbers, but it shows that Samsung E&A had ₩142.9b of debt in March 2024, down from ₩460.1b, one year before. But on the other hand it also has ₩1.43t in cash, leading to a ₩1.29t net cash position.

How Healthy Is Samsung E&A's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Samsung E&A had liabilities of ₩4.16t due within 12 months and liabilities of ₩280.6b due beyond that. Offsetting this, it had ₩1.43t in cash and ₩2.19t in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩821.5b.

Since publicly traded Samsung E&A shares are worth a total of ₩4.35t, it seems unlikely that this level of liabilities would be a major threat. 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, Samsung E&A boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Samsung E&A has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Samsung E&A 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Samsung E&A 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. Over the last three years, Samsung E&A recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

Although Samsung E&A's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩1.29t. And it impressed us with its EBIT growth of 30% over the last year. So we don't have any problem with Samsung E&A's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Samsung E&A that you should be aware of.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com