Health Check: How Prudently Does Samjin LND (KOSDAQ:054090) Use Debt?

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 Samjin LND Co., Ltd. (KOSDAQ:054090) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Samjin LND

What Is Samjin LND's Net Debt?

The chart below, which you can click on for greater detail, shows that Samjin LND had ₩71.3b in debt in June 2024; about the same as the year before. However, it does have ₩10.2b in cash offsetting this, leading to net debt of about ₩61.1b.

How Healthy Is Samjin LND's Balance Sheet?

According to the last reported balance sheet, Samjin LND had liabilities of ₩93.4b due within 12 months, and liabilities of ₩15.9b due beyond 12 months. On the other hand, it had cash of ₩10.2b and ₩51.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩47.9b.

This deficit casts a shadow over the ₩21.4b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Samjin LND would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Samjin LND's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Samjin LND made a loss at the EBIT level, and saw its revenue drop to ₩210b, which is a fall of 2.6%. That's not what we would hope to see.

Caveat Emptor

Importantly, Samjin LND had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping ₩14b. 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. Not least because it had negative free cash flow of ₩11b over the last twelve months. That means it's on the risky side of things. 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. For instance, we've identified 3 warning signs for Samjin LND (2 are significant) you should be aware of.

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.