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.' 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 Didim Inc. (KOSDAQ:217620) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Didim
What Is Didim's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Didim had debt of ₩36.4b, up from ₩26.5b in one year. On the flip side, it has ₩7.55b in cash leading to net debt of about ₩28.8b.
How Strong Is Didim's Balance Sheet?
We can see from the most recent balance sheet that Didim had liabilities of ₩47.6b falling due within a year, and liabilities of ₩38.8b due beyond that. On the other hand, it had cash of ₩7.55b and ₩5.85b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩73.0b.
This is a mountain of leverage relative to its market capitalization of ₩86.4b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Didim'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.
Over 12 months, Didim made a loss at the EBIT level, and saw its revenue drop to ₩93b, which is a fall of 26%. That makes us nervous, to say the least.
Caveat Emptor
Not only did Didim's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩8.7b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩5.3b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. Take risks, for example - Didim has 4 warning signs (and 2 which can't be ignored) we think you should know about.
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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About KOSDAQ:A217620
Didim E&F
A food service company, engages in restaurant, livestock processing, and food manufacturing and distribution businesses.
Weak fundamentals or lack of information.
