Sam Chun Dang Pharm (KOSDAQ:000250) Seems To Use Debt Quite Sensibly

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.' 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. Importantly, Sam Chun Dang Pharm. Co., Ltd (KOSDAQ:000250) does carry debt. But the more important question is: how much risk is that debt creating?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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

What Is Sam Chun Dang Pharm's Net Debt?

As you can see below, Sam Chun Dang Pharm had ₩65.7b of debt at September 2023, down from ₩70.3b a year prior. However, it does have ₩91.7b in cash offsetting this, leading to net cash of ₩26.0b.

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 ₩97.0b falling due within a year, and liabilities of ₩24.5b due beyond that. Offsetting these obligations, it had cash of ₩91.7b as well as receivables valued at ₩41.3b due within 12 months. So it actually has ₩11.5b more liquid assets than total liabilities.

Having regard to Sam Chun Dang Pharm's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩1.67t 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.

On the other hand, Sam Chun Dang Pharm's EBIT dived 12%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sam Chun Dang Pharm's earnings that will influence how the balance sheet holds up in the future. 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. 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. Over the last two years, Sam Chun Dang Pharm saw substantial negative free cash flow, in total. 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 ₩26.0b, as well as more liquid assets than liabilities. So we are not troubled with Sam Chun Dang Pharm's debt use. 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, we've discovered 2 warning signs for Sam Chun Dang Pharm (1 doesn't sit too well with us!) that you should be aware of before investing here.

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.