Sam Chun Dang Pharm (KOSDAQ:000250) Takes On Some Risk With Its Use Of Debt

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 can see that Sam Chun Dang Pharm. Co., Ltd (KOSDAQ:000250) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

View 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 ₩48.9b of debt at June 2024, down from ₩79.2b a year prior. However, it does have ₩132.0b in cash offsetting this, leading to net cash of ₩83.1b.

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

The latest balance sheet data shows that Sam Chun Dang Pharm had liabilities of ₩74.2b due within a year, and liabilities of ₩60.7b falling due after that. Offsetting this, it had ₩132.0b in cash and ₩72.5b in receivables that were due within 12 months. So it can boast ₩69.6b more liquid assets than total liabilities.

This short term liquidity is a sign that Sam Chun Dang Pharm could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 21% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept 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. Over the last two years, Sam Chun Dang Pharm saw substantial negative free cash flow, in total. 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 ₩83.1b, 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Sam Chun Dang Pharm is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.