Samsung C&T (KRX:028260) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Samsung C&T Corporation (KRX:028260) does carry debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Samsung C&T

How Much Debt Does Samsung C&T Carry?

You can click the graphic below for the historical numbers, but it shows that Samsung C&T had ₩4.45t of debt in December 2023, down from ₩5.62t, one year before. However, its balance sheet shows it holds ₩5.30t in cash, so it actually has ₩845.3b net cash.

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

We can see from the most recent balance sheet that Samsung C&T had liabilities of ₩15t falling due within a year, and liabilities of ₩11t due beyond that. On the other hand, it had cash of ₩5.30t and ₩7.11t worth of receivables due within a year. So it has liabilities totalling ₩14t more than its cash and near-term receivables, combined.

This deficit isn't so bad because Samsung C&T is worth a massive ₩25t, and thus could probably raise enough capital to shore up 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 C&T also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Samsung C&T grew its EBIT by 12% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Samsung C&T 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. During the last three years, Samsung C&T produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Samsung C&T's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩845.3b. On top of that, it increased its EBIT by 12% in the last twelve months. So we are not troubled with Samsung C&T'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. We've identified 1 warning sign with Samsung C&T , and understanding them should be part of your investment process.

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.