We Think Samsung E&A (KRX:028050) Can Stay On Top Of Its Debt

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.' 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. As with many other companies Samsung E&A Co., Ltd. (KRX:028050) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Samsung E&A

How Much Debt Does Samsung E&A Carry?

The image below, which you can click on for greater detail, shows that Samsung E&A had debt of ₩99.2b at the end of June 2024, a reduction from ₩229.2b over a year. However, it does have ₩1.31t in cash offsetting this, leading to net cash of ₩1.21t.

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 ₩4.59t due within 12 months and liabilities of ₩230.1b due beyond that. Offsetting these obligations, it had cash of ₩1.31t as well as receivables valued at ₩4.71t due within 12 months. So it can boast ₩1.20t more liquid assets than total liabilities.

This surplus suggests that Samsung E&A is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Samsung E&A has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Samsung E&A saw its EBIT drop by 5.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Samsung E&A's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 reported free cash flow worth 13% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Samsung E&A has net cash of ₩1.21t, as well as more liquid assets than liabilities. So we don't have any problem with Samsung E&A's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Samsung E&A 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.