These 4 Measures Indicate That SAMICK MUSICAL INSTRUMENT (KRX:002450) Is Using Debt Extensively

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. As with many other companies SAMICK MUSICAL INSTRUMENT Co., Ltd (KRX:002450) makes use of debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

What Is SAMICK MUSICAL INSTRUMENT's Debt?

You can click the graphic below for the historical numbers, but it shows that SAMICK MUSICAL INSTRUMENT had ₩166.6b of debt in December 2024, down from ₩181.5b, one year before. However, it does have ₩106.0b in cash offsetting this, leading to net debt of about ₩60.6b.

How Strong Is SAMICK MUSICAL INSTRUMENT's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that SAMICK MUSICAL INSTRUMENT had liabilities of ₩124.3b due within 12 months and liabilities of ₩128.6b due beyond that. Offsetting these obligations, it had cash of ₩106.0b as well as receivables valued at ₩29.8b due within 12 months. So its liabilities total ₩117.1b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩104.8b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

View our latest analysis for SAMICK MUSICAL INSTRUMENT

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While we wouldn't worry about SAMICK MUSICAL INSTRUMENT's net debt to EBITDA ratio of 2.7, we think its super-low interest cover of 1.7 times is a sign of high leverage. It seems that the business incurs large depreciation and amortisation charges, so maybe its debt load is heavier than it would first appear, since EBITDA is arguably a generous measure of earnings. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. More concerning, SAMICK MUSICAL INSTRUMENT saw its EBIT drop by 9.6% in the last twelve months. If that earnings trend continues the company will face an uphill battle to pay off its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is SAMICK MUSICAL INSTRUMENT's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, SAMICK MUSICAL INSTRUMENT actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

We'd go so far as to say SAMICK MUSICAL INSTRUMENT's interest cover was disappointing. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that SAMICK MUSICAL INSTRUMENT's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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. For example SAMICK MUSICAL INSTRUMENT has 4 warning signs (and 1 which can't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.