We Think Daehan Green Power (KOSDAQ:060900) Has A Fair Chunk Of Debt

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.' 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 can see that Daehan Green Power Corporation (KOSDAQ:060900) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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 Daehan Green Power

How Much Debt Does Daehan Green Power Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Daehan Green Power had ₩37.4b of debt, an increase on ₩20.9b, over one year. However, it does have ₩7.22b in cash offsetting this, leading to net debt of about ₩30.2b.

How Healthy Is Daehan Green Power's Balance Sheet?

We can see from the most recent balance sheet that Daehan Green Power had liabilities of ₩34.3b falling due within a year, and liabilities of ₩5.73b due beyond that. On the other hand, it had cash of ₩7.22b and ₩10.3b worth of receivables due within a year. So it has liabilities totalling ₩22.5b more than its cash and near-term receivables, combined.

Since publicly traded Daehan Green Power shares are worth a total of ₩437.6b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Daehan Green Power'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, Daehan Green Power made a loss at the EBIT level, and saw its revenue drop to ₩5.0b, which is a fall of 68%. That makes us nervous, to say the least.

Caveat Emptor

While Daehan Green Power's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩10b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩17b of cash over the last year. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Daehan Green Power (2 are significant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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