Does Samsung BiologicsLtd (KRX:207940) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Samsung Biologics Co.,Ltd. (KRX:207940) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Samsung BiologicsLtd

What Is Samsung BiologicsLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Samsung BiologicsLtd had ₩1.50t of debt in March 2024, down from ₩2.10t, one year before. But on the other hand it also has ₩2.06t in cash, leading to a ₩563.1b net cash position.

How Strong Is Samsung BiologicsLtd's Balance Sheet?

We can see from the most recent balance sheet that Samsung BiologicsLtd had liabilities of ₩4.65t falling due within a year, and liabilities of ₩1.87t due beyond that. Offsetting these obligations, it had cash of ₩2.06t as well as receivables valued at -₩300 due within 12 months. So it has liabilities totalling ₩4.45t more than its cash and near-term receivables, combined.

Given Samsung BiologicsLtd has a humongous market capitalization of ₩53t, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Samsung BiologicsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Samsung BiologicsLtd grew its EBIT by 14% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Samsung BiologicsLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Samsung BiologicsLtd 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. In the last three years, Samsung BiologicsLtd's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Samsung BiologicsLtd has ₩563.1b in net cash. And it also grew its EBIT by 14% over the last year. So we don't have any problem with Samsung BiologicsLtd's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Samsung BiologicsLtd's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.