These 4 Measures Indicate That Samsung BiologicsLtd (KRX:207940) Is Using Debt Reasonably Well

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 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 note that Samsung Biologics Co.,Ltd. (KRX:207940) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Samsung BiologicsLtd

What Is Samsung BiologicsLtd's Net Debt?

As you can see below, Samsung BiologicsLtd had ₩591.7b of debt at September 2020, down from ₩637.8b a year prior. But on the other hand it also has ₩904.1b in cash, leading to a ₩312.4b net cash position.

A Look At Samsung BiologicsLtd's Liabilities

The latest balance sheet data shows that Samsung BiologicsLtd had liabilities of ₩625.9b due within a year, and liabilities of ₩1.01t falling due after that. Offsetting these obligations, it had cash of ₩904.1b as well as receivables valued at ₩400.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩733.9b.

This state of affairs indicates that Samsung BiologicsLtd'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 ₩53t company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Samsung BiologicsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Samsung BiologicsLtd grew its EBIT by 271% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Samsung BiologicsLtd 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 three years, Samsung BiologicsLtd 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

We could understand if investors are concerned about Samsung BiologicsLtd's liabilities, but we can be reassured by the fact it has has net cash of ₩312.4b. And we liked the look of last year's 271% year-on-year EBIT growth. So we don't have any problem with Samsung BiologicsLtd's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Samsung BiologicsLtd .

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. 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.
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