Does DAE-IL (KRX:092200) Have A 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 DAE-IL Corporation (KRX:092200) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for DAE-IL

What Is DAE-IL's Net Debt?

You can click the graphic below for the historical numbers, but it shows that DAE-IL had ₩338.6b of debt in September 2020, down from ₩424.8b, one year before. However, because it has a cash reserve of ₩18.9b, its net debt is less, at about ₩319.6b.

How Strong Is DAE-IL's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DAE-IL had liabilities of ₩473.3b due within 12 months and liabilities of ₩90.2b due beyond that. Offsetting these obligations, it had cash of ₩18.9b as well as receivables valued at ₩80.4b due within 12 months. So it has liabilities totalling ₩464.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩123.6b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, DAE-IL would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is DAE-IL's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year DAE-IL had a loss before interest and tax, and actually shrunk its revenue by 18%, to ₩455b. That's not what we would hope to see.

Caveat Emptor

While DAE-IL's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩53b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost ₩85b in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for DAE-IL (1 is a bit concerning!) that you should be aware of before investing here.

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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