These 4 Measures Indicate That Samsung Electro-Mechanics (KRX:009150) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Samsung Electro-Mechanics Co., Ltd. (KRX:009150) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Samsung Electro-Mechanics

How Much Debt Does Samsung Electro-Mechanics Carry?

As you can see below, Samsung Electro-Mechanics had ₩1.56t of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩2.03t in cash, leading to a ₩469.7b net cash position.

How Strong Is Samsung Electro-Mechanics' Balance Sheet?

According to the last reported balance sheet, Samsung Electro-Mechanics had liabilities of ₩3.06t due within 12 months, and liabilities of ₩719.7b due beyond 12 months. Offsetting this, it had ₩2.03t in cash and ₩1.49t in receivables that were due within 12 months. So it has liabilities totalling ₩257.2b 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. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Samsung Electro-Mechanics boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Samsung Electro-Mechanics grew its EBIT by 11% last year, making its debt load easier to handle. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Samsung Electro-Mechanics's liabilities, but we can be reassured by the fact it has has net cash of ₩469.7b. On top of that, it increased its EBIT by 11% in the last twelve months. So we are not troubled with Samsung Electro-Mechanics's debt use. 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. We've identified 1 warning sign with Samsung Electro-Mechanics , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.