Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, DRB Industrial Co., Ltd. (KRX:163560) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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.
View our latest analysis for DRB Industrial
What Is DRB Industrial's Debt?
As you can see below, DRB Industrial had ₩24.8b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₩52.2b in cash, so it actually has ₩27.4b net cash.
A Look At DRB Industrial's Liabilities
The latest balance sheet data shows that DRB Industrial had liabilities of ₩59.3b due within a year, and liabilities of ₩16.6b falling due after that. Offsetting these obligations, it had cash of ₩52.2b as well as receivables valued at ₩73.3b due within 12 months. So it can boast ₩49.6b more liquid assets than total liabilities.
This luscious liquidity implies that DRB Industrial's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that DRB Industrial has more cash than debt is arguably a good indication that it can manage its debt safely.
The good news is that DRB Industrial has increased its EBIT by 2.0% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is DRB Industrial'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. DRB Industrial 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. During the last three years, DRB Industrial produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. 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 DRB Industrial has ₩27.4b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩20b, being 72% of its EBIT. So is DRB Industrial's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example DRB Industrial has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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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About KOSE:A163560
Adequate balance sheet second-rate dividend payer.
