These 4 Measures Indicate That Daehan Synthetic Fiber (KRX:003830) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Daehan Synthetic Fiber Co., Ltd. (KRX:003830) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Daehan Synthetic Fiber

What Is Daehan Synthetic Fiber's Debt?

The image below, which you can click on for greater detail, shows that Daehan Synthetic Fiber had debt of ₩2.43b at the end of September 2020, a reduction from ₩13.8b over a year. But on the other hand it also has ₩33.8b in cash, leading to a ₩31.3b net cash position.

How Healthy Is Daehan Synthetic Fiber's Balance Sheet?

We can see from the most recent balance sheet that Daehan Synthetic Fiber had liabilities of ₩13.4b falling due within a year, and liabilities of ₩77.4b due beyond that. On the other hand, it had cash of ₩33.8b and ₩9.82b worth of receivables due within a year. So it has liabilities totalling ₩47.2b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Daehan Synthetic Fiber is worth ₩123.0b, 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. Despite its noteworthy liabilities, Daehan Synthetic Fiber boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Daehan Synthetic Fiber's load is not too heavy, because its EBIT was down 26% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. 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. Daehan Synthetic Fiber 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. Over the last three years, Daehan Synthetic Fiber actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While Daehan Synthetic Fiber does have more liabilities than liquid assets, it also has net cash of ₩31.3b. And it impressed us with free cash flow of ₩17b, being 174% of its EBIT. 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 instance, we've identified 1 warning sign for Daehan Synthetic Fiber that you should be aware of.

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. 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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