Dynamic Design (KRX:145210) Is Making Moderate Use Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Dynamic Design Co., LTD. (KRX:145210) makes use of debt. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Dynamic Design

What Is Dynamic Design's Net Debt?

As you can see below, at the end of March 2024, Dynamic Design had ₩36.8b of debt, up from ₩28.7b a year ago. Click the image for more detail. However, it does have ₩24.8b in cash offsetting this, leading to net debt of about ₩12.0b.

How Strong Is Dynamic Design's Balance Sheet?

According to the last reported balance sheet, Dynamic Design had liabilities of ₩42.4b due within 12 months, and liabilities of ₩15.6b due beyond 12 months. Offsetting these obligations, it had cash of ₩24.8b as well as receivables valued at ₩21.8b due within 12 months. So it has liabilities totalling ₩11.5b more than its cash and near-term receivables, combined.

Since publicly traded Dynamic Design shares are worth a total of ₩126.0b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Dynamic Design's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Dynamic Design saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Dynamic Design had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩7.0b at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩16b of cash over the last year. So in short it's a really risky stock. 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. For example Dynamic Design has 3 warning signs (and 1 which is significant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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