Warren Buffett famously said, '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 note that DY Corporation (KRX:013570) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for DY
How Much Debt Does DY Carry?
As you can see below, DY had ₩152.0b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩165.7b in cash offsetting this, leading to net cash of ₩13.6b.
How Healthy Is DY's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that DY had liabilities of ₩356.4b due within 12 months and liabilities of ₩60.2b due beyond that. On the other hand, it had cash of ₩165.7b and ₩222.3b worth of receivables due within a year. So it has liabilities totalling ₩28.6b more than its cash and near-term receivables, combined.
DY has a market capitalization of ₩113.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, DY boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that DY grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since DY 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. DY may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, DY recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing Up
While DY does have more liabilities than liquid assets, it also has net cash of ₩13.6b. On top of that, it increased its EBIT by 15% in the last twelve months. So we are not troubled with DY's debt use. 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. We've identified 4 warning signs with DY (at least 1 which is concerning) , and understanding them should be part of your investment process.
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.
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About KOSE:A013570
DY
Manufactures and sells hydraulic equipment, automotive parts, and industrial machinery in South Korea and internationally.
Flawless balance sheet slight.