Does Samyang Tongsang (KRX:002170) Have A Healthy Balance Sheet?

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.' 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 Samyang Tongsang Co., Ltd (KRX:002170) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Samyang Tongsang

What Is Samyang Tongsang's Debt?

As you can see below, Samyang Tongsang had ₩10.3b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩180.9b in cash to offset that, meaning it has ₩170.7b net cash.

How Strong Is Samyang Tongsang's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Samyang Tongsang had liabilities of ₩28.7b due within 12 months and liabilities of ₩10.6b due beyond that. Offsetting this, it had ₩180.9b in cash and ₩64.7b in receivables that were due within 12 months. So it can boast ₩206.4b more liquid assets than total liabilities.

This excess liquidity is a great indication that Samyang Tongsang's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Samyang Tongsang has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Samyang Tongsang grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Samyang Tongsang's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Samyang Tongsang 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, Samyang Tongsang recorded free cash flow worth a fulsome 89% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Samyang Tongsang has ₩170.7b in net cash and a strong balance sheet. The cherry on top was that in converted 89% of that EBIT to free cash flow, bringing in ₩33b. At the end of the day we're not concerned about Samyang Tongsang's 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. To that end, you should be aware of the 1 warning sign we've spotted with Samyang Tongsang .

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. 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.
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