Does DaeChang Solution (KOSDAQ:096350) 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. Importantly, DaeChang Solution Co., Ltd. (KOSDAQ:096350) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for DaeChang Solution

What Is DaeChang Solution's Debt?

As you can see below, DaeChang Solution had ₩60.5b of debt at September 2020, down from ₩64.8b a year prior. However, it also had ₩2.07b in cash, and so its net debt is ₩58.5b.

A Look At DaeChang Solution's Liabilities

Zooming in on the latest balance sheet data, we can see that DaeChang Solution had liabilities of ₩61.2b due within 12 months and liabilities of ₩19.0b due beyond that. Offsetting this, it had ₩2.07b in cash and ₩9.69b in receivables that were due within 12 months. So it has liabilities totalling ₩68.4b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩84.6b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is DaeChang Solution's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, DaeChang Solution made a loss at the EBIT level, and saw its revenue drop to ₩57b, which is a fall of 6.3%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months DaeChang Solution produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩6.4b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩624m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with DaeChang Solution (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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