Is Daekyo (KRX:019680) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Daekyo Co., Ltd. (KRX:019680) does carry debt. But is this debt a concern to shareholders?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Daekyo

What Is Daekyo's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Daekyo had ₩27.8b of debt in September 2020, down from ₩32.2b, one year before. But it also has ₩148.8b in cash to offset that, meaning it has ₩121.0b net cash.

A Look At Daekyo's Liabilities

Zooming in on the latest balance sheet data, we can see that Daekyo had liabilities of ₩186.9b due within 12 months and liabilities of ₩123.7b due beyond that. Offsetting this, it had ₩148.8b in cash and ₩45.4b in receivables that were due within 12 months. So it has liabilities totalling ₩116.3b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Daekyo has a market capitalization of ₩294.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Daekyo boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Daekyo can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Daekyo had a loss before interest and tax, and actually shrunk its revenue by 13%, to ₩659b. We would much prefer see growth.

So How Risky Is Daekyo?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Daekyo had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩12b and booked a ₩20b accounting loss. Given it only has net cash of ₩121.0b, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. To that end, you should be aware of the 1 warning sign we've spotted with Daekyo .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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