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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Didim
What Is Didim's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Didim had ₩35.8b of debt, an increase on ₩28.8b, over one year. On the flip side, it has ₩5.96b in cash leading to net debt of about ₩29.9b.
A Look At Didim's Liabilities
Zooming in on the latest balance sheet data, we can see that Didim had liabilities of ₩50.2b due within 12 months and liabilities of ₩34.2b due beyond that. On the other hand, it had cash of ₩5.96b and ₩4.96b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩73.5b.
When you consider that this deficiency exceeds the company's ₩70.9b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Didim'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.
In the last year Didim had a loss before interest and tax, and actually shrunk its revenue by 35%, to ₩81b. To be frank that doesn't bode well.
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). Indeed, it lost a very considerable ₩14b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩5.0b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. Be aware that Didim is showing 2 warning signs in our investment analysis , and 1 of those is concerning...
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 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.
