Does DaeChang Solution (KOSDAQ:096350) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that DaeChang Solution Co., Ltd. (KOSDAQ:096350) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for DaeChang Solution

How Much Debt Does DaeChang Solution Carry?

You can click the graphic below for the historical numbers, but it shows that DaeChang Solution had ₩60.5b of debt in September 2020, down from ₩64.8b, one year before. On the flip side, it has ₩2.07b in cash leading to net debt of about ₩58.5b.

How Healthy Is DaeChang Solution's Balance Sheet?

According to the last reported balance sheet, DaeChang Solution had liabilities of ₩61.2b due within 12 months, and liabilities of ₩19.0b due beyond 12 months. Offsetting these obligations, it had cash of ₩2.07b as well as receivables valued at ₩9.69b due within 12 months. So its liabilities total ₩68.4b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩75.4b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since DaeChang Solution 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.

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

Importantly, DaeChang Solution had an earnings before interest and tax (EBIT) loss over the last year. 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. Another cause for caution is that is bled ₩624m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. Be aware that DaeChang Solution is showing 3 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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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