Is Sam Chun Dang Pharm (KOSDAQ:000250) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Sam Chun Dang Pharm. Co., Ltd (KOSDAQ:000250) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sam Chun Dang Pharm

What Is Sam Chun Dang Pharm's Net Debt?

The image below, which you can click on for greater detail, shows that Sam Chun Dang Pharm had debt of ₩48.4b at the end of March 2024, a reduction from ₩78.8b over a year. However, its balance sheet shows it holds ₩84.6b in cash, so it actually has ₩36.3b net cash.

A Look At Sam Chun Dang Pharm's Liabilities

According to the last reported balance sheet, Sam Chun Dang Pharm had liabilities of ₩61.1b due within 12 months, and liabilities of ₩52.2b due beyond 12 months. On the other hand, it had cash of ₩84.6b and ₩35.2b worth of receivables due within a year. So it can boast ₩6.46b 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 while it's hard to imagine that the ₩2.89t company is struggling for cash, we still think it's worth monitoring its 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.

But the other side of the story is that Sam Chun Dang Pharm saw its EBIT decline by 8.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 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 two 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 we empathize with investors who find debt concerning, you should keep in mind that Sam Chun Dang Pharm has net cash of ₩36.3b, as well as more liquid assets than liabilities. So we don't have any problem with Sam Chun Dang Pharm's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Sam Chun Dang Pharm that you should be aware of.

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.