Is Samwha ElectronicsLtd (KRX:011230) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Samwha Electronics Co.,Ltd. (KRX:011230) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Samwha ElectronicsLtd

What Is Samwha ElectronicsLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Samwha ElectronicsLtd had ₩20.7b in debt in December 2020; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

How Healthy Is Samwha ElectronicsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Samwha ElectronicsLtd had liabilities of ₩28.8b due within 12 months and liabilities of ₩12.4b due beyond that. On the other hand, it had cash of ₩132.2m and ₩7.61b worth of receivables due within a year. So it has liabilities totalling ₩33.5b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩41.3b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Samwha ElectronicsLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Samwha ElectronicsLtd made a loss at the EBIT level, and saw its revenue drop to ₩40b, which is a fall of 4.0%. We would much prefer see growth.

Caveat Emptor

Importantly, Samwha ElectronicsLtd had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩1.3b. 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 ₩2.8b of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example, we've discovered 2 warning signs for Samwha ElectronicsLtd (1 is significant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.