Is Samsung C&T (KRX:028260) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Samsung C&T Corporation (KRX:028260) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Samsung C&T

What Is Samsung C&T's Debt?

As you can see below, Samsung C&T had ₩4.73t of debt at June 2024, down from ₩5.44t a year prior. But on the other hand it also has ₩5.22t in cash, leading to a ₩493.7b net cash position.

How Healthy Is Samsung C&T's Balance Sheet?

According to the last reported balance sheet, Samsung C&T had liabilities of ₩15t due within 12 months, and liabilities of ₩11t due beyond 12 months. On the other hand, it had cash of ₩5.22t and ₩7.18t worth of receivables due within a year. So it has liabilities totalling ₩14t more than its cash and near-term receivables, combined.

This is a mountain of leverage even relative to its gargantuan market capitalization of ₩22t. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Samsung C&T boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Samsung C&T grew its EBIT by 7.8% in the last year, making that debt load look even more manageable. 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 C&T 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 C&T 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. In the last three years, Samsung C&T's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Samsung C&T does have more liabilities than liquid assets, it also has net cash of ₩493.7b. And it also grew its EBIT by 7.8% over the last year. So we don't have any problem with Samsung C&T's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Samsung C&T you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.