Is SAMWHA CAPACITORLTD (KRX:001820) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, SAMWHA CAPACITOR Co.,LTD (KRX:001820) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for SAMWHA CAPACITORLTD

What Is SAMWHA CAPACITORLTD's Net Debt?

As you can see below, SAMWHA CAPACITORLTD had ₩10.5b of debt at June 2020, down from ₩19.5b a year prior. However, it does have ₩25.2b in cash offsetting this, leading to net cash of ₩14.7b.

A Look At SAMWHA CAPACITORLTD's Liabilities

The latest balance sheet data shows that SAMWHA CAPACITORLTD had liabilities of ₩45.9b due within a year, and liabilities of ₩13.2b falling due after that. Offsetting these obligations, it had cash of ₩25.2b as well as receivables valued at ₩56.6b due within 12 months. So it can boast ₩22.6b more liquid assets than total liabilities.

This short term liquidity is a sign that SAMWHA CAPACITORLTD could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that SAMWHA CAPACITORLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for SAMWHA CAPACITORLTD if management cannot prevent a repeat of the 71% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if SAMWHA CAPACITORLTD can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While SAMWHA CAPACITORLTD 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. Looking at the most recent three years, SAMWHA CAPACITORLTD recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that SAMWHA CAPACITORLTD has net cash of ₩14.7b, as well as more liquid assets than liabilities. So we are not troubled with SAMWHA CAPACITORLTD's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for SAMWHA CAPACITORLTD that you should be aware of.

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.

When trading SAMWHA CAPACITORLTD or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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