Sambo Industrial (KOSDAQ:009620) Use Of Debt Could Be Considered Risky

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Sambo Industrial Co., Ltd. (KOSDAQ:009620) does carry debt. But the real question is whether this debt is making the company risky.

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When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Sambo Industrial's Net Debt?

The image below, which you can click on for greater detail, shows that Sambo Industrial had debt of ₩175.0b at the end of December 2024, a reduction from ₩189.8b over a year. However, it also had ₩11.8b in cash, and so its net debt is ₩163.2b.

How Strong Is Sambo Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sambo Industrial had liabilities of ₩209.7b due within 12 months and liabilities of ₩54.3b due beyond that. Offsetting this, it had ₩11.8b in cash and ₩50.4b in receivables that were due within 12 months. So its liabilities total ₩201.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩36.5b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Sambo Industrial would likely require a major re-capitalisation if it had to pay its creditors today.

View our latest analysis for Sambo Industrial

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.045 times and a disturbingly high net debt to EBITDA ratio of 12.3 hit our confidence in Sambo Industrial like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. One redeeming factor for Sambo Industrial is that it turned last year's EBIT loss into a gain of ₩616m, over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sambo Industrial will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot .

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Sambo Industrial saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Sambo Industrial's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least its EBIT growth rate is not so bad. We think the chances that Sambo Industrial has too much debt a very significant. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Sambo Industrial (including 2 which can't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.