We Think Dong Suh Companies (KRX:026960) Can Manage Its Debt With Ease

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.' 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, Dong Suh Companies Inc. (KRX:026960) does carry debt. But the real question is whether this debt is making the company risky.

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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Dong Suh Companies

What Is Dong Suh Companies's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Dong Suh Companies had debt of ₩2.44b, up from ₩982.7m in one year. But it also has ₩755.2b in cash to offset that, meaning it has ₩752.8b net cash.

A Look At Dong Suh Companies' Liabilities

According to the last reported balance sheet, Dong Suh Companies had liabilities of ₩50.9b due within 12 months, and liabilities of ₩10.5b due beyond 12 months. Offsetting these obligations, it had cash of ₩755.2b as well as receivables valued at ₩54.2b due within 12 months. So it actually has ₩747.9b more liquid assets than total liabilities.

It's good to see that Dong Suh Companies has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Dong Suh Companies has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Dong Suh Companies saw its EBIT decline by 2.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is Dong Suh Companies'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dong Suh Companies 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. Happily for any shareholders, Dong Suh Companies actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Dong Suh Companies has ₩752.8b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 241% of that EBIT to free cash flow, bringing in ₩115b. So we don't think Dong Suh Companies's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Dong Suh Companies , and understanding them should be part of your investment process.

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.