Samsung Engineering (KRX:028050) Seems To Use Debt Quite Sensibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Samsung Engineering Co., Ltd. (KRX:028050) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Samsung Engineering

What Is Samsung Engineering's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Samsung Engineering had debt of ₩341.7b, up from ₩212.3b in one year. However, its balance sheet shows it holds ₩722.5b in cash, so it actually has ₩380.8b net cash.

A Look At Samsung Engineering's Liabilities

The latest balance sheet data shows that Samsung Engineering had liabilities of ₩2.93t due within a year, and liabilities of ₩332.1b falling due after that. Offsetting these obligations, it had cash of ₩722.5b as well as receivables valued at ₩1.87t due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩672.1b.

Samsung Engineering has a market capitalization of ₩2.69t, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Samsung Engineering also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Samsung Engineering saw its EBIT drop by 9.5% 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 ultimately the future profitability of the business will decide if Samsung Engineering can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Samsung Engineering 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. Happily for any shareholders, Samsung Engineering actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Samsung Engineering's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩380.8b. And it impressed us with free cash flow of -₩92b, being 128% of its EBIT. So we are not troubled with Samsung Engineering'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 instance, we've identified 1 warning sign for Samsung Engineering that you should be aware of.

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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