Samwha ElectronicsLtd (KRX:011230) Is Making Moderate Use Of Debt

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.' 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. We can see that Samwha Electronics Co.,Ltd. (KRX:011230) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

See 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 ₩23.0b of debt in June 2024, down from ₩27.6b, one year before. However, it also had ₩823.6m in cash, and so its net debt is ₩22.2b.

A Look At Samwha ElectronicsLtd's Liabilities

The latest balance sheet data shows that Samwha ElectronicsLtd had liabilities of ₩32.8b due within a year, and liabilities of ₩13.8b falling due after that. Offsetting these obligations, it had cash of ₩823.6m as well as receivables valued at ₩6.04b due within 12 months. So its liabilities total ₩39.8b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩52.0b, so it does suggest shareholders should keep an eye on Samwha ElectronicsLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 15%, to ₩38b. We would much prefer see growth.

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. Its EBIT loss was a whopping ₩6.1b. 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. Another cause for caution is that is bled ₩5.6b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 5 warning signs with Samwha ElectronicsLtd (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.