We Think DAEMO Engineering (KOSDAQ:317850) Has A Fair Chunk 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.' 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. Importantly, DAEMO Engineering Co., Ltd. (KOSDAQ:317850) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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, 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 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 ₩9.35b at the end of September 2024, a reduction from ₩10.7b over a year. However, because it has a cash reserve of ₩5.81b, its net debt is less, at about ₩3.55b.

How Healthy Is DAEMO Engineering's Balance Sheet?

We can see from the most recent balance sheet that DAEMO Engineering had liabilities of ₩12.7b falling due within a year, and liabilities of ₩4.49b due beyond that. On the other hand, it had cash of ₩5.81b and ₩9.01b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩2.35b.

Since publicly traded DAEMO Engineering shares are worth a total of ₩70.6b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is DAEMO Engineering'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.

In the last year DAEMO Engineering had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₩41b. We would much prefer see growth.

Caveat Emptor

While DAEMO Engineering's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩667m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩1.2b. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for DAEMO Engineering (1 is a bit concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.