Here's Why Sam Chun Dang Pharm (KOSDAQ:000250) Has A Meaningful Debt Burden

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Sam Chun Dang Pharm. Co., Ltd (KOSDAQ:000250) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Sam Chun Dang Pharm's Net Debt?

As you can see below, Sam Chun Dang Pharm had ₩45.8b of debt at March 2025, down from ₩48.4b a year prior. However, its balance sheet shows it holds ₩127.6b in cash, so it actually has ₩81.8b net cash.

How Strong Is Sam Chun Dang Pharm's Balance Sheet?

According to the last reported balance sheet, Sam Chun Dang Pharm had liabilities of ₩70.3b due within 12 months, and liabilities of ₩77.3b due beyond 12 months. Offsetting this, it had ₩127.6b in cash and ₩41.6b in receivables that were due within 12 months. So it actually has ₩21.7b more liquid assets than total liabilities.

This state of affairs indicates that Sam Chun Dang Pharm's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩3.74t company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Sam Chun Dang Pharm has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Sam Chun Dang Pharm

The modesty of its debt load may become crucial for Sam Chun Dang Pharm if management cannot prevent a repeat of the 87% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Sam Chun Dang Pharm will need earnings to service that debt. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. During the last three years, Sam Chun Dang Pharm burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

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 ₩81.8b, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about Sam Chun Dang Pharm's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Sam Chun Dang Pharm has 1 warning sign we think you should be aware of.

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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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.