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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Dongbu Corporation (KRX:005960) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Dongbu
How Much Debt Does Dongbu Carry?
As you can see below, Dongbu had ₩528.3b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₩147.5b in cash leading to net debt of about ₩380.8b.
A Look At Dongbu's Liabilities
The latest balance sheet data shows that Dongbu had liabilities of ₩1.13t due within a year, and liabilities of ₩210.5b falling due after that. Offsetting this, it had ₩147.5b in cash and ₩653.6b in receivables that were due within 12 months. So it has liabilities totalling ₩534.6b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the ₩106.7b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Dongbu would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dongbu 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 Dongbu wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to ₩1.9t. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
Even though Dongbu managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at ₩5.5b. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of ₩26b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Dongbu you should be aware of, and 1 of them doesn't sit too well with us.
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.
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About KOSE:A005960
Good value with adequate balance sheet.
