Is SAMG Entertainment (KOSDAQ:419530) Using Too Much 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. As with many other companies SAMG Entertainment Co., Ltd. (KOSDAQ:419530) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for SAMG Entertainment

What Is SAMG Entertainment's Net Debt?

As you can see below, SAMG Entertainment had ₩23.6b of debt at September 2024, down from ₩25.7b a year prior. However, its balance sheet shows it holds ₩26.1b in cash, so it actually has ₩2.56b net cash.

How Healthy Is SAMG Entertainment's Balance Sheet?

According to the last reported balance sheet, SAMG Entertainment had liabilities of ₩22.0b due within 12 months, and liabilities of ₩33.3b due beyond 12 months. Offsetting these obligations, it had cash of ₩26.1b as well as receivables valued at ₩9.22b due within 12 months. So it has liabilities totalling ₩20.0b more than its cash and near-term receivables, combined.

Given SAMG Entertainment has a market capitalization of ₩115.9b, it's hard to believe these liabilities pose much threat. 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, SAMG Entertainment also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SAMG Entertainment can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year SAMG Entertainment wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to ₩109b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is SAMG Entertainment?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months SAMG Entertainment lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩6.5b and booked a ₩34b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩2.56b. That means it could keep spending at its current rate for more than two years. SAMG Entertainment's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. We've identified 1 warning sign with SAMG Entertainment , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.