We Think Samsung Electronics (KRX:005930) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Samsung Electronics Co., Ltd. (KRX:005930) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Samsung Electronics

What Is Samsung Electronics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Samsung Electronics had ₩11t of debt, an increase on ₩9.94t, over one year. But it also has ₩97t in cash to offset that, meaning it has ₩87t net cash.

How Healthy Is Samsung Electronics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Samsung Electronics had liabilities of ₩82t due within 12 months and liabilities of ₩17t due beyond that. Offsetting this, it had ₩97t in cash and ₩49t in receivables that were due within 12 months. So it actually has ₩47t 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. Succinctly put, Samsung Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Samsung Electronics's load is not too heavy, because its EBIT was down 58% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Samsung Electronics 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 2.2% 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 we empathize with investors who find debt concerning, you should keep in mind that Samsung Electronics has net cash of ₩87t, as well as more liquid assets than liabilities. So we don't have any problem with Samsung Electronics's use of debt. 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 example - Samsung Electronics has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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