Is DHX Company (KOSDAQ:031860) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that DHX Company Co., Ltd. (KOSDAQ:031860) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

What Is DHX Company's Debt?

The image below, which you can click on for greater detail, shows that at December 2024 DHX Company had debt of ₩4.47b, up from ₩2.59b in one year. However, its balance sheet shows it holds ₩10.7b in cash, so it actually has ₩6.22b net cash.

A Look At DHX Company's Liabilities

We can see from the most recent balance sheet that DHX Company had liabilities of ₩7.81b falling due within a year, and liabilities of ₩1.10b due beyond that. Offsetting these obligations, it had cash of ₩10.7b as well as receivables valued at ₩6.92b due within 12 months. So it actually has ₩8.70b more liquid assets than total liabilities.

This luscious liquidity implies that DHX Company's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, DHX Company boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since DHX Company 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.

See our latest analysis for DHX Company

In the last year DHX Company had a loss before interest and tax, and actually shrunk its revenue by 14%, to ₩9.5b. We would much prefer see growth.

So How Risky Is DHX Company?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that DHX Company had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩5.8b of cash and made a loss of ₩17b. However, it has net cash of ₩6.22b, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 4 warning signs we've spotted with DHX Company (including 3 which make us uncomfortable) .

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.