We Think Sam Chun Dang Pharm (KOSDAQ:000250) Is Taking Some Risk With Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Sam Chun Dang Pharm's Debt?

You can click the graphic below for the historical numbers, but it shows that Sam Chun Dang Pharm had ₩45.3b of debt in December 2024, down from ₩48.2b, one year before. But it also has ₩141.9b in cash to offset that, meaning it has ₩96.6b net cash.

A Look At Sam Chun Dang Pharm's Liabilities

The latest balance sheet data shows that Sam Chun Dang Pharm had liabilities of ₩93.4b due within a year, and liabilities of ₩76.9b falling due after that. Offsetting this, it had ₩141.9b in cash and ₩61.4b in receivables that were due within 12 months. So it actually has ₩32.9b 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 ₩4.25t 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.

Check out 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 73% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But it is Sam Chun Dang Pharm's earnings that will influence how the balance sheet holds up in the future. 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. Over the last three 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 it is always sensible to investigate a company's debt, in this case Sam Chun Dang Pharm has ₩96.6b in net cash and a decent-looking balance sheet. So while Sam Chun Dang Pharm does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Sam Chun Dang Pharm (of which 1 is significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.