Is Daebo MagneticLtd (KOSDAQ:290670) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Daebo Magnetic Co.,Ltd. (KOSDAQ:290670) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Daebo MagneticLtd

What Is Daebo MagneticLtd's Debt?

The image below, which you can click on for greater detail, shows that Daebo MagneticLtd had debt of ₩4.00b at the end of September 2024, a reduction from ₩4.20b over a year. However, its balance sheet shows it holds ₩7.66b in cash, so it actually has ₩3.66b net cash.

A Look At Daebo MagneticLtd's Liabilities

According to the last reported balance sheet, Daebo MagneticLtd had liabilities of ₩26.4b due within 12 months, and liabilities of ₩2.07b due beyond 12 months. On the other hand, it had cash of ₩7.66b and ₩3.14b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩17.7b.

Given Daebo MagneticLtd has a market capitalization of ₩126.9b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Daebo MagneticLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Daebo MagneticLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Daebo MagneticLtd had a loss before interest and tax, and actually shrunk its revenue by 53%, to ₩29b. That makes us nervous, to say the least.

So How Risky Is Daebo MagneticLtd?

Although Daebo MagneticLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩1.8b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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 Daebo MagneticLtd 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.