We Think Samyang Tongsang (KRX:002170) Can Manage Its Debt With Ease

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Samyang Tongsang Co., Ltd (KRX:002170) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Samyang Tongsang

How Much Debt Does Samyang Tongsang Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Samyang Tongsang had debt of ₩12.9b, up from ₩12.4b in one year. However, it does have ₩214.6b in cash offsetting this, leading to net cash of ₩201.6b.

How Healthy Is Samyang Tongsang's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Samyang Tongsang had liabilities of ₩33.4b due within 12 months and liabilities of ₩13.1b due beyond that. Offsetting these obligations, it had cash of ₩214.6b as well as receivables valued at ₩61.6b due within 12 months. So it actually has ₩229.6b more liquid assets than total liabilities.

This surplus liquidity suggests that Samyang Tongsang's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Samyang Tongsang boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Samyang Tongsang grew its EBIT by 17% 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Samyang Tongsang 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. Over the last three years, Samyang Tongsang recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Samyang Tongsang has ₩201.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩38b, being 91% of its EBIT. 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. Case in point: We've spotted 1 warning sign for Samyang Tongsang you should be aware of.

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. 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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