Samsung Electronics (KRX:005930) Has A Pretty 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. Importantly, Samsung Electronics Co., Ltd. (KRX:005930) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Samsung Electronics

What Is Samsung Electronics's Net Debt?

As you can see below, at the end of December 2023, Samsung Electronics had ₩7.96t of debt, up from ₩5.93t a year ago. Click the image for more detail. But it also has ₩92t in cash to offset that, meaning it has ₩84t net cash.

A Look At Samsung Electronics' Liabilities

We can see from the most recent balance sheet that Samsung Electronics had liabilities of ₩76t falling due within a year, and liabilities of ₩17t due beyond that. Offsetting this, it had ₩92t in cash and ₩43t in receivables that were due within 12 months. So it can boast ₩43t more liquid assets than total liabilities.

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

It is just as well that Samsung Electronics's load is not too heavy, because its EBIT was down 85% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Electronics'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Samsung Electronics 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. Over the last three years, Samsung Electronics reported free cash flow worth 7.8% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Samsung Electronics has ₩84t in net cash and a decent-looking balance sheet. So we are not troubled with Samsung Electronics's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Samsung Electronics that 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.