Here's Why Sam Chun Dang Pharm (KOSDAQ:000250) 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.' 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. We can see that Sam Chun Dang Pharm. Co., Ltd (KOSDAQ:000250) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sam Chun Dang Pharm

What Is Sam Chun Dang Pharm's Debt?

As you can see below, at the end of June 2020, Sam Chun Dang Pharm had ₩21.8b of debt, up from ₩20.9b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩86.5b in cash, so it actually has ₩64.7b net cash.

A Look At Sam Chun Dang Pharm's Liabilities

The latest balance sheet data shows that Sam Chun Dang Pharm had liabilities of ₩39.6b due within a year, and liabilities of ₩23.3b falling due after that. Offsetting this, it had ₩86.5b in cash and ₩45.8b in receivables that were due within 12 months. So it can boast ₩69.4b more liquid assets than total liabilities.

This surplus suggests that Sam Chun Dang Pharm has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Sam Chun Dang Pharm boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Sam Chun Dang Pharm saw its EBIT drop by 3.5% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sam Chun Dang Pharm'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sam Chun Dang Pharm 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. In the last three years, Sam Chun Dang Pharm's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sam Chun Dang Pharm has net cash of ₩64.7b, as well as more liquid assets than liabilities. So we don't have any problem with Sam Chun Dang Pharm's use of debt. 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 Sam Chun Dang Pharm's earnings per share history for free.

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.

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