Does Daehan Synthetic Fiber (KRX:003830) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Daehan Synthetic Fiber Co., Ltd. (KRX:003830) makes use of debt. 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Daehan Synthetic Fiber

How Much Debt Does Daehan Synthetic Fiber Carry?

You can click the graphic below for the historical numbers, but it shows that Daehan Synthetic Fiber had ₩2.71b of debt in December 2020, down from ₩7.92b, one year before. But on the other hand it also has ₩40.0b in cash, leading to a ₩37.3b net cash position.

How Strong Is Daehan Synthetic Fiber's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Daehan Synthetic Fiber had liabilities of ₩14.8b due within 12 months and liabilities of ₩100.3b due beyond that. On the other hand, it had cash of ₩40.0b and ₩11.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩63.8b.

This deficit isn't so bad because Daehan Synthetic Fiber is worth ₩161.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Daehan Synthetic Fiber also has more cash than debt, so we're pretty confident it can manage its debt safely.

In fact Daehan Synthetic Fiber's saving grace is its low debt levels, because its EBIT has tanked 39% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Daehan Synthetic Fiber'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Daehan Synthetic Fiber has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Daehan Synthetic Fiber actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Daehan Synthetic Fiber's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩37.3b. The cherry on top was that in converted 275% of that EBIT to free cash flow, bringing in ₩18b. So we are not troubled with Daehan Synthetic Fiber's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Daehan Synthetic Fiber has 1 warning sign we think you should be aware of.

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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