Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Daelim Trading Co., Ltd. (KRX:006570) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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.
What Is Daelim Trading's Net Debt?
As you can see below, Daelim Trading had ₩57.1b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of ₩11.1b, its net debt is less, at about ₩46.1b.
How Healthy Is Daelim Trading's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Daelim Trading had liabilities of ₩64.0b due within 12 months and liabilities of ₩19.2b due beyond that. Offsetting these obligations, it had cash of ₩11.1b as well as receivables valued at ₩29.2b due within 12 months. So it has liabilities totalling ₩43.0b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of ₩62.1b, so it does suggest shareholders should keep an eye on Daelim Trading's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Daelim Trading'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 Daelim Trading had a loss before interest and tax, and actually shrunk its revenue by 15%, to ₩157b. That's not what we would hope to see.
Not only did Daelim Trading's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩6.9b. 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 ₩13b into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Daelim Trading is showing 4 warning signs in our investment analysis , and 1 of those is significant...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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