Would Sam-A Aluminium Company (KRX:006110) Be Better Off With Less Debt?

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.' 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. We can see that Sam-A Aluminium Company, Limited (KRX:006110) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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.

View our latest analysis for Sam-A Aluminium Company

How Much Debt Does Sam-A Aluminium Company Carry?

As you can see below, at the end of September 2024, Sam-A Aluminium Company had ₩124.5b of debt, up from ₩111.6b a year ago. Click the image for more detail. However, it does have ₩45.8b in cash offsetting this, leading to net debt of about ₩78.7b.

How Healthy Is Sam-A Aluminium Company's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sam-A Aluminium Company had liabilities of ₩83.1b due within 12 months and liabilities of ₩67.4b due beyond that. On the other hand, it had cash of ₩45.8b and ₩31.8b worth of receivables due within a year. So it has liabilities totalling ₩72.9b more than its cash and near-term receivables, combined.

Of course, Sam-A Aluminium Company has a market capitalization of ₩500.2b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Sam-A Aluminium Company 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.

In the last year Sam-A Aluminium Company had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₩250b. We would much prefer see growth.

Caveat Emptor

While Sam-A Aluminium Company's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩6.7b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩44b of cash over the last year. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Sam-A Aluminium Company 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.