Is Daewon Sanup (KOSDAQ:005710) A Risky Investment?

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 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. As with many other companies Daewon Sanup Co., Ltd (KOSDAQ:005710) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Daewon Sanup

How Much Debt Does Daewon Sanup Carry?

You can click the graphic below for the historical numbers, but it shows that Daewon Sanup had ₩21.5b of debt in March 2024, down from ₩30.6b, one year before. However, it does have ₩279.6b in cash offsetting this, leading to net cash of ₩258.1b.

A Look At Daewon Sanup's Liabilities

The latest balance sheet data shows that Daewon Sanup had liabilities of ₩154.9b due within a year, and liabilities of ₩18.0b falling due after that. Offsetting these obligations, it had cash of ₩279.6b as well as receivables valued at ₩126.6b due within 12 months. So it actually has ₩233.3b more liquid assets than total liabilities.

This surplus strongly suggests that Daewon Sanup has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Daewon Sanup boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Daewon Sanup has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Daewon Sanup'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 most recent three years, Daewon Sanup recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Daewon Sanup has net cash of ₩258.1b and plenty of liquid assets. And we liked the look of last year's 31% year-on-year EBIT growth. The bottom line is that Daewon Sanup's use of debt is absolutely fine. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Daewon Sanup you should know about.

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.