Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Dohwa Engineering Co., Ltd. (KRX:002150) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. 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.
Check out our latest analysis for Dohwa Engineering
What Is Dohwa Engineering's Debt?
The chart below, which you can click on for greater detail, shows that Dohwa Engineering had ₩3.67b in debt in September 2020; about the same as the year before. But on the other hand it also has ₩68.8b in cash, leading to a ₩65.2b net cash position.
A Look At Dohwa Engineering's Liabilities
Zooming in on the latest balance sheet data, we can see that Dohwa Engineering had liabilities of ₩161.2b due within 12 months and liabilities of ₩13.5b due beyond that. On the other hand, it had cash of ₩68.8b and ₩102.5b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
Having regard to Dohwa Engineering's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩274.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Dohwa Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Dohwa Engineering grew its EBIT by 4.0% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dohwa Engineering can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Dohwa Engineering 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. Happily for any shareholders, Dohwa Engineering actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
We could understand if investors are concerned about Dohwa Engineering's liabilities, but we can be reassured by the fact it has has net cash of ₩65.2b. And it impressed us with free cash flow of ₩25b, being 109% of its EBIT. So is Dohwa Engineering's debt a risk? It doesn't seem so to us. 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. Be aware that Dohwa Engineering is showing 1 warning sign in our investment analysis , 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. 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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About KOSE:A002150
Dohwa Engineering
Operates as an engineering consulting company in South Korea and internationally.
Adequate balance sheet average dividend payer.
