Samsung Electro-Mechanics (KRX:009150) Has A Pretty 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. We note that Samsung Electro-Mechanics Co., Ltd. (KRX:009150) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Samsung Electro-Mechanics

What Is Samsung Electro-Mechanics's Net Debt?

As you can see below, at the end of December 2023, Samsung Electro-Mechanics had ₩1.52t of debt, up from ₩1.42t a year ago. Click the image for more detail. However, it does have ₩1.67t in cash offsetting this, leading to net cash of ₩147.7b.

How Strong Is Samsung Electro-Mechanics' Balance Sheet?

The latest balance sheet data shows that Samsung Electro-Mechanics had liabilities of ₩2.90t due within a year, and liabilities of ₩727.1b falling due after that. On the other hand, it had cash of ₩1.67t and ₩1.24t worth of receivables due within a year. So it has liabilities totalling ₩717.2b more than its cash and near-term receivables, combined.

Of course, Samsung Electro-Mechanics has a market capitalization of ₩11t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Samsung Electro-Mechanics also has more cash than debt, so we're pretty confident it can manage its debt safely.

It is just as well that Samsung Electro-Mechanics's load is not too heavy, because its EBIT was down 46% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Samsung Electro-Mechanics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Samsung Electro-Mechanics 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. In the last three years, Samsung Electro-Mechanics's free cash flow amounted to 31% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Samsung Electro-Mechanics has ₩147.7b in net cash. So we are not troubled with Samsung Electro-Mechanics's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Samsung Electro-Mechanics .

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.