Dong-A Hwa SungLtd (KOSDAQ:041930) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Dong-A Hwa Sung Co.,Ltd. (KOSDAQ:041930) does use debt in its business. But the real question is whether this debt is making the company risky.

We've discovered 2 warning signs about Dong-A Hwa SungLtd. View them for free.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Dong-A Hwa SungLtd's Debt?

As you can see below, Dong-A Hwa SungLtd had ₩74.2b of debt at December 2024, down from ₩87.6b a year prior. However, it does have ₩43.7b in cash offsetting this, leading to net debt of about ₩30.5b.

How Healthy Is Dong-A Hwa SungLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dong-A Hwa SungLtd had liabilities of ₩134.5b due within 12 months and liabilities of ₩3.59b due beyond that. On the other hand, it had cash of ₩43.7b and ₩101.3b worth of receivables due within a year. So it can boast ₩6.90b more liquid assets than total liabilities.

This surplus suggests that Dong-A Hwa SungLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty.

See our latest analysis for Dong-A Hwa SungLtd

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With net debt sitting at just 0.99 times EBITDA, Dong-A Hwa SungLtd is arguably pretty conservatively geared. And this view is supported by the solid interest coverage, with EBIT coming in at 8.2 times the interest expense over the last year. But the bad news is that Dong-A Hwa SungLtd has seen its EBIT plunge 15% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Dong-A Hwa SungLtd 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, Dong-A Hwa SungLtd recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Based on what we've seen Dong-A Hwa SungLtd is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. There's no doubt that it has an adequate capacity handle its debt, based on its EBITDA,. Considering this range of data points, we think Dong-A Hwa SungLtd is in a good position to manage its debt levels. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. For instance, we've identified 2 warning signs for Dong-A Hwa SungLtd that you should be aware of.

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.