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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that Samsung Electro-Mechanics Co., Ltd. (KRX:009150) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, 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.

See our latest analysis for Samsung Electro-Mechanics

What Is Samsung Electro-Mechanics's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Samsung Electro-Mechanics had debt of ₩1.99t, up from ₩1.45t in one year. However, it does have ₩2.37t in cash offsetting this, leading to net cash of ₩383.6b.

A Look At Samsung Electro-Mechanics' Liabilities

Zooming in on the latest balance sheet data, we can see that Samsung Electro-Mechanics had liabilities of ₩3.41t due within 12 months and liabilities of ₩855.0b due beyond that. Offsetting this, it had ₩2.37t in cash and ₩1.45t in receivables that were due within 12 months. So it has liabilities totalling ₩441.2b more than its cash and near-term receivables, combined.

Since publicly traded Samsung Electro-Mechanics shares are worth a total of ₩11t, it seems unlikely that this level of liabilities would be a major threat. 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!

On the other hand, Samsung Electro-Mechanics saw its EBIT drop by 9.8% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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. Looking at the most recent three years, Samsung Electro-Mechanics recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Samsung Electro-Mechanics has ₩383.6b in net cash. So we are not troubled with Samsung Electro-Mechanics's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Samsung Electro-Mechanics, you may well want to click here to check an interactive graph of its earnings per share history.

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.