Daewon Sanup (KOSDAQ:005710) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Daewon Sanup Co., Ltd (KOSDAQ:005710) does have debt on its balance sheet. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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 step when considering a company's debt levels is to consider its cash and debt together.

What Is Daewon Sanup's Debt?

The image below, which you can click on for greater detail, shows that Daewon Sanup had debt of ₩10.7b at the end of December 2024, a reduction from ₩25.2b over a year. But it also has ₩329.6b in cash to offset that, meaning it has ₩318.8b net cash.

How Healthy Is Daewon Sanup's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Daewon Sanup had liabilities of ₩188.9b due within 12 months and liabilities of ₩10.5b due beyond that. Offsetting this, it had ₩329.6b in cash and ₩166.5b in receivables that were due within 12 months. So it actually has ₩296.7b more liquid assets than total liabilities.

This luscious liquidity implies that Daewon Sanup's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Daewon Sanup has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Daewon Sanup

On top of that, Daewon Sanup grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Daewon Sanup 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Daewon Sanup has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Daewon Sanup recorded free cash flow worth a fulsome 83% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Daewon Sanup has net cash of ₩318.8b and plenty of liquid assets. And it impressed us with free cash flow of ₩105b, being 83% of its EBIT. The bottom line is that Daewon Sanup's use of debt is absolutely fine. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Daewon Sanup's earnings per share history for free.

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.