We Think Samwha ElectronicsLtd (KRX:011230) Has A Fair Chunk Of 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.' 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.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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.

View our latest analysis for Samwha ElectronicsLtd

What Is Samwha ElectronicsLtd's Net Debt?

As you can see below, Samwha ElectronicsLtd had ₩20.4b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Samwha ElectronicsLtd's Balance Sheet?

According to the last reported balance sheet, Samwha ElectronicsLtd had liabilities of ₩29.8b due within 12 months, and liabilities of ₩12.4b due beyond 12 months. On the other hand, it had cash of ₩149.7m and ₩8.14b worth of receivables due within a year. So its liabilities total ₩33.9b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩43.9b, so it does suggest shareholders should keep an eye on Samwha ElectronicsLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Samwha ElectronicsLtd made a loss at the EBIT level, and saw its revenue drop to ₩40b, which is a fall of 6.4%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Samwha ElectronicsLtd produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩1.6b. 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. However, it doesn't help that it burned through ₩3.4b of cash over the last year. So in short it's a really risky stock. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Samwha ElectronicsLtd (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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. 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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