Health Check: How Prudently Does Duckyang Ind (KRX:024900) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Duckyang Ind. Co., Ltd. (KRX:024900) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Duckyang Ind

How Much Debt Does Duckyang Ind Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Duckyang Ind had ₩89.6b of debt, an increase on ₩75.1b, over one year. On the flip side, it has ₩58.5b in cash leading to net debt of about ₩31.0b.

A Look At Duckyang Ind's Liabilities

We can see from the most recent balance sheet that Duckyang Ind had liabilities of ₩425.7b falling due within a year, and liabilities of ₩55.3b due beyond that. On the other hand, it had cash of ₩58.5b and ₩179.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩243.0b.

This deficit casts a shadow over the ₩58.4b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Duckyang Ind would probably need a major re-capitalization if its creditors were to demand repayment. 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 Duckyang Ind 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.

Over 12 months, Duckyang Ind made a loss at the EBIT level, and saw its revenue drop to ₩1.3t, which is a fall of 6.4%. We would much prefer see growth.

Caveat Emptor

Importantly, Duckyang Ind had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩5.3b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₩8.3b in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For example, we've discovered 2 warning signs for Duckyang Ind (1 is significant!) that you should be aware of before investing here.

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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