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.' 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. We can see that Samwha Electronics Co.,Ltd. (KRX:011230) does use debt in its business. But should shareholders be worried about its use of debt?

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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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Samwha ElectronicsLtd Carry?

The image below, which you can click on for greater detail, shows that at March 2025 Samwha ElectronicsLtd had debt of ₩28.7b, up from ₩22.3b in one year. However, it does have ₩793.1m in cash offsetting this, leading to net debt of about ₩27.9b.

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 ₩39.8b due within 12 months and liabilities of ₩13.3b due beyond that. On the other hand, it had cash of ₩793.1m and ₩6.19b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩46.0b.

This deficit isn't so bad because Samwha ElectronicsLtd is worth ₩77.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

View our latest analysis for Samwha ElectronicsLtd

Over 12 months, Samwha ElectronicsLtd made a loss at the EBIT level, and saw its revenue drop to ₩33b, which is a fall of 19%. 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. Indeed, it lost ₩7.3b 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. Another cause for caution is that is bled ₩7.3b 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Samwha ElectronicsLtd (at least 2 which are a bit concerning) , 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. 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.