Samwha ElectricLtd (KRX:009470) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Samwha Electric Co.,Ltd. (KRX:009470) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Samwha ElectricLtd

How Much Debt Does Samwha ElectricLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Samwha ElectricLtd had ₩13.9b of debt in September 2020, down from ₩19.4b, one year before. But it also has ₩15.7b in cash to offset that, meaning it has ₩1.85b net cash.

How Strong Is Samwha ElectricLtd's Balance Sheet?

According to the last reported balance sheet, Samwha ElectricLtd had liabilities of ₩54.3b due within 12 months, and liabilities of ₩17.2b due beyond 12 months. Offsetting these obligations, it had cash of ₩15.7b as well as receivables valued at ₩42.9b due within 12 months. So it has liabilities totalling ₩12.9b more than its cash and near-term receivables, combined.

Since publicly traded Samwha ElectricLtd shares are worth a total of ₩134.9b, it seems unlikely that this level of liabilities would be a major threat. 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, Samwha ElectricLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Samwha ElectricLtd's EBIT fell a jaw-dropping 74% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Samwha ElectricLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Samwha ElectricLtd 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. Over the last three years, Samwha ElectricLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Samwha ElectricLtd has ₩1.85b in net cash. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in ₩7.9b. So we don't have any problem with Samwha ElectricLtd's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Samwha ElectricLtd you should know about.

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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