We Think Sempio Foods (KRX:248170) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Sempio Foods Company (KRX:248170) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sempio Foods

What Is Sempio Foods's Debt?

The image below, which you can click on for greater detail, shows that Sempio Foods had debt of ₩3.58b at the end of September 2020, a reduction from ₩21.1b over a year. However, it does have ₩31.4b in cash offsetting this, leading to net cash of ₩27.9b.

How Strong Is Sempio Foods' Balance Sheet?

The latest balance sheet data shows that Sempio Foods had liabilities of ₩45.9b due within a year, and liabilities of ₩13.1b falling due after that. On the other hand, it had cash of ₩31.4b and ₩45.8b worth of receivables due within a year. So it actually has ₩18.2b more liquid assets than total liabilities.

This surplus suggests that Sempio Foods has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sempio Foods has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Sempio Foods has boosted its EBIT by 53%, 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 Sempio Foods'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sempio Foods 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. During the last three years, Sempio Foods produced sturdy free cash flow equating to 75% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sempio Foods has net cash of ₩27.9b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 53% over the last year. So we don't think Sempio Foods's use of debt is risky. 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 Sempio Foods's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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