Does Samyang Foods (KRX:003230) Have A Healthy Balance Sheet?

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. We note that Samyang Foods Co., Ltd. (KRX:003230) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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 Foods

What Is Samyang Foods's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Samyang Foods had debt of ₩72.8b, up from ₩58.8b in one year. But it also has ₩136.6b in cash to offset that, meaning it has ₩63.8b net cash.

A Look At Samyang Foods's Liabilities

We can see from the most recent balance sheet that Samyang Foods had liabilities of ₩152.2b falling due within a year, and liabilities of ₩53.9b due beyond that. On the other hand, it had cash of ₩136.6b and ₩52.8b worth of receivables due within a year. So it has liabilities totalling ₩16.7b more than its cash and near-term receivables, combined.

Of course, Samyang Foods has a market capitalization of ₩742.0b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Samyang Foods also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Samyang Foods has boosted its EBIT by 47%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Samyang Foods's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Samyang Foods 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. In the last three years, Samyang Foods's free cash flow amounted to 32% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Samyang Foods has ₩63.8b in net cash. And we liked the look of last year's 47% year-on-year EBIT growth. So is Samyang Foods's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Samyang Foods's earnings per share history for free.

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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