Is Samwha ElectronicsLtd (KRX:011230) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Electronics Co.,Ltd. (KRX:011230) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Samwha ElectronicsLtd

What Is Samwha ElectronicsLtd's Net Debt?

As you can see below, Samwha ElectronicsLtd had ₩25.4b of debt at September 2024, down from ₩26.8b a year prior. On the flip side, it has ₩897.5m in cash leading to net debt of about ₩24.5b.

How Healthy Is Samwha ElectronicsLtd's Balance Sheet?

The latest balance sheet data shows that Samwha ElectronicsLtd had liabilities of ₩33.9b due within a year, and liabilities of ₩13.9b falling due after that. On the other hand, it had cash of ₩897.5m and ₩6.39b worth of receivables due within a year. So it has liabilities totalling ₩40.6b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩57.5b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Samwha ElectronicsLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Samwha ElectronicsLtd had a loss before interest and tax, and actually shrunk its revenue by 8.2%, to ₩38b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Samwha ElectronicsLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₩6.5b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩8.3b of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Samwha ElectronicsLtd (2 are a bit concerning!) that you should be aware of before investing here.

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.