Anam ElectronicsLtd (KRX:008700) Could Easily Take On More Debt

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. Importantly, Anam Electronics Co.,Ltd. (KRX:008700) does carry debt. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Anam ElectronicsLtd Carry?

As you can see below, Anam ElectronicsLtd had ₩27.6b of debt at December 2024, down from ₩40.1b a year prior. But it also has ₩50.5b in cash to offset that, meaning it has ₩22.9b net cash.

How Healthy Is Anam ElectronicsLtd's Balance Sheet?

The latest balance sheet data shows that Anam ElectronicsLtd had liabilities of ₩85.5b due within a year, and liabilities of ₩2.18b falling due after that. Offsetting these obligations, it had cash of ₩50.5b as well as receivables valued at ₩63.4b due within 12 months. So it can boast ₩26.3b more liquid assets than total liabilities.

It's good to see that Anam ElectronicsLtd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Anam ElectronicsLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Anam ElectronicsLtd

Fortunately, Anam ElectronicsLtd grew its EBIT by 5.6% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Anam ElectronicsLtd'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. Anam ElectronicsLtd 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. Happily for any shareholders, Anam ElectronicsLtd actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anam ElectronicsLtd has net cash of ₩22.9b, as well as more liquid assets than liabilities. The cherry on top was that in converted 295% of that EBIT to free cash flow, bringing in ₩42b. So is Anam ElectronicsLtd's debt a risk? It doesn't seem so to us. 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. For example, we've discovered 1 warning sign for Anam ElectronicsLtd that you should be aware of before investing here.

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.