Here's Why Samyang Foods (KRX:003230) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Samyang Foods Co., Ltd. (KRX:003230) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Samyang Foods

How Much Debt Does Samyang Foods Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Samyang Foods had ₩72.8b of debt, an increase on ₩58.8b, over one year. However, it does have ₩136.6b in cash offsetting this, leading to net cash of ₩63.8b.

How Healthy Is Samyang Foods' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Samyang Foods had liabilities of ₩152.2b due within 12 months and liabilities of ₩53.9b due beyond that. Offsetting these obligations, it had cash of ₩136.6b as well as receivables valued at ₩52.8b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩16.7b.

Given Samyang Foods has a market capitalization of ₩693.0b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

On top of that, Samyang Foods grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Samyang Foods recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 it impressed us with its EBIT growth of 47% over the last year. So is Samyang Foods's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Samyang Foods, you may well want to click here to check an interactive graph of its earnings per share history.

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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