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.' 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. Importantly, Di Dong Il Corporation (KRX:001530) does carry debt. But is this debt a concern to shareholders?
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. 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, 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.
See our latest analysis for Di Dong Il
How Much Debt Does Di Dong Il Carry?
You can click the graphic below for the historical numbers, but it shows that Di Dong Il had ₩250.9b of debt in September 2020, down from ₩276.5b, one year before. On the flip side, it has ₩51.8b in cash leading to net debt of about ₩199.1b.
How Healthy Is Di Dong Il's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Di Dong Il had liabilities of ₩324.6b due within 12 months and liabilities of ₩124.3b due beyond that. On the other hand, it had cash of ₩51.8b and ₩132.1b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩265.0b.
This deficit is considerable relative to its market capitalization of ₩349.1b, so it does suggest shareholders should keep an eye on Di Dong Il's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.
We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Di Dong Il has a debt to EBITDA ratio of 2.7 and its EBIT covered its interest expense 6.4 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Di Dong Il grew its EBIT by 8.7% in the last year. Whilst that hardly knocks our socks off it is a positive when it comes to debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Di Dong Il can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. In the last three years, Di Dong Il's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Our View
Both Di Dong Il's level of total liabilities and its net debt to EBITDA were discouraging. But its not so bad at growing its EBIT. We think that Di Dong Il's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 4 warning signs we've spotted with Di Dong Il .
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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This article by Simply Wall St is general in nature. 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:A001530
Di Dong Il
Operates in the textile and clothing industries in South Korea and internationally.
Adequate balance sheet with moderate growth potential.