We Think DYPNFLtd (KOSDAQ:104460) Can Stay On Top Of Its Debt

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.' 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. Importantly, DYPNF Co.,Ltd (KOSDAQ:104460) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 DYPNFLtd

What Is DYPNFLtd's Net Debt?

As you can see below, at the end of December 2020, DYPNFLtd had ₩23.8b of debt, up from ₩13.4b a year ago. Click the image for more detail. But on the other hand it also has ₩33.7b in cash, leading to a ₩9.87b net cash position.

How Healthy Is DYPNFLtd's Balance Sheet?

The latest balance sheet data shows that DYPNFLtd had liabilities of ₩47.7b due within a year, and liabilities of ₩15.7b falling due after that. On the other hand, it had cash of ₩33.7b and ₩45.0b worth of receivables due within a year. So it actually has ₩15.4b more liquid assets than total liabilities.

This surplus suggests that DYPNFLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that DYPNFLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also good is that DYPNFLtd grew its EBIT at 18% over the last year, further increasing its ability to manage debt. 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 DYPNFLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While DYPNFLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, DYPNFLtd created free cash flow amounting to 13% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that DYPNFLtd has net cash of ₩9.87b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 18% over the last year. So we are not troubled with DYPNFLtd's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example DYPNFLtd has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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