Does Samjin LND (KOSDAQ:054090) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Samjin LND Co., Ltd. (KOSDAQ:054090) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Samjin LND

How Much Debt Does Samjin LND Carry?

The image below, which you can click on for greater detail, shows that at September 2023 Samjin LND had debt of ₩71.3b, up from ₩66.8b in one year. On the flip side, it has ₩23.7b in cash leading to net debt of about ₩47.6b.

How Healthy Is Samjin LND's Balance Sheet?

We can see from the most recent balance sheet that Samjin LND had liabilities of ₩92.2b falling due within a year, and liabilities of ₩21.3b due beyond that. On the other hand, it had cash of ₩23.7b and ₩46.7b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩43.2b.

Given this deficit is actually higher than the company's market capitalization of ₩32.3b, we think shareholders really should watch Samjin LND's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Samjin LND'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.

Over 12 months, Samjin LND made a loss at the EBIT level, and saw its revenue drop to ₩221b, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

Not only did Samjin LND's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩5.1b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₩10b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Samjin LND (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.