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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. 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.

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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

How Much Debt Does Samwha ElectronicsLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Samwha ElectronicsLtd had ₩22.3b of debt in March 2024, down from ₩26.8b, one year before. On the flip side, it has ₩1.75b in cash leading to net debt of about ₩20.5b.

How Strong Is Samwha ElectronicsLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Samwha ElectronicsLtd had liabilities of ₩32.9b due within 12 months and liabilities of ₩13.6b due beyond that. Offsetting these obligations, it had cash of ₩1.75b as well as receivables valued at ₩6.83b due within 12 months. So it has liabilities totalling ₩37.9b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Samwha ElectronicsLtd is worth ₩66.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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 14%, to ₩40b. That's not what we would hope to see.

Caveat Emptor

While Samwha ElectronicsLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩6.3b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩5.0b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For instance, we've identified 4 warning signs for Samwha ElectronicsLtd (2 are potentially serious) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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