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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Sam Chun Dang Pharm. Co., Ltd (KOSDAQ:000250) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sam Chun Dang Pharm

How Much Debt Does Sam Chun Dang Pharm Carry?

As you can see below, Sam Chun Dang Pharm had ₩55.5b of debt at September 2024, down from ₩65.7b a year prior. But it also has ₩161.0b in cash to offset that, meaning it has ₩105.5b net cash.

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

We can see from the most recent balance sheet that Sam Chun Dang Pharm had liabilities of ₩58.3b falling due within a year, and liabilities of ₩78.6b due beyond that. Offsetting this, it had ₩161.0b in cash and ₩36.8b in receivables that were due within 12 months. So it actually has ₩60.9b 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. 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.

It is just as well that Sam Chun Dang Pharm's load is not too heavy, because its EBIT was down 44% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Sam Chun Dang Pharm may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Sam Chun Dang Pharm burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Sam Chun Dang Pharm has ₩105.5b in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Sam Chun Dang Pharm's balance sheet. 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 instance, we've identified 4 warning signs for Sam Chun Dang Pharm (1 doesn't sit too well with us) 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.