Here's Why DTR Automotive (KRX:007340) Can Manage Its Debt Responsibly

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 note that DTR Automotive Corporation (KRX:007340) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. 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.

Check out our latest analysis for DTR Automotive

How Much Debt Does DTR Automotive Carry?

The image below, which you can click on for greater detail, shows that DTR Automotive had debt of ₩147.1b at the end of September 2020, a reduction from ₩159.1b over a year. However, it does have ₩159.4b in cash offsetting this, leading to net cash of ₩12.2b.

How Strong Is DTR Automotive's Balance Sheet?

We can see from the most recent balance sheet that DTR Automotive had liabilities of ₩280.5b falling due within a year, and liabilities of ₩31.8b due beyond that. Offsetting these obligations, it had cash of ₩159.4b as well as receivables valued at ₩172.2b due within 12 months. So it can boast ₩19.4b more liquid assets than total liabilities.

This short term liquidity is a sign that DTR Automotive could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, DTR Automotive boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, DTR Automotive's EBIT dived 16%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since DTR Automotive will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. DTR Automotive may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, DTR Automotive recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case DTR Automotive has ₩12.2b in net cash and a decent-looking balance sheet. So we don't have any problem with DTR Automotive's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for DTR Automotive you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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