DAEMO Engineering (KOSDAQ:317850) Is Making Moderate Use Of 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. As with many other companies DAEMO Engineering Co., Ltd. (KOSDAQ:317850) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for DAEMO Engineering

What Is DAEMO Engineering's Debt?

The image below, which you can click on for greater detail, shows that DAEMO Engineering had debt of ₩9.74b at the end of March 2024, a reduction from ₩11.8b over a year. However, it also had ₩6.65b in cash, and so its net debt is ₩3.09b.

How Strong Is DAEMO Engineering's Balance Sheet?

The latest balance sheet data shows that DAEMO Engineering had liabilities of ₩13.1b due within a year, and liabilities of ₩7.39b falling due after that. Offsetting these obligations, it had cash of ₩6.65b as well as receivables valued at ₩11.1b due within 12 months. So its liabilities total ₩2.74b more than the combination of its cash and short-term receivables.

Of course, DAEMO Engineering has a market capitalization of ₩99.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since DAEMO Engineering 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, DAEMO Engineering made a loss at the EBIT level, and saw its revenue drop to ₩42b, which is a fall of 25%. To be frank that doesn't bode well.

Caveat Emptor

Not only did DAEMO Engineering's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩1.1b. 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. We would feel better if it turned its trailing twelve month loss of ₩1.1b into a profit. So to be blunt we do think it is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for DAEMO Engineering (of which 1 can't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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