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.' 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. Importantly, DGP Co.,Ltd. (KOSDAQ:060900) does carry debt. But the more important question is: how much risk is that debt creating?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for DGPLtd
How Much Debt Does DGPLtd Carry?
The image below, which you can click on for greater detail, shows that DGPLtd had debt of ₩12.7b at the end of June 2024, a reduction from ₩14.4b over a year. On the flip side, it has ₩5.87b in cash leading to net debt of about ₩6.84b.
How Healthy Is DGPLtd's Balance Sheet?
We can see from the most recent balance sheet that DGPLtd had liabilities of ₩19.9b falling due within a year, and liabilities of ₩3.75b due beyond that. Offsetting these obligations, it had cash of ₩5.87b as well as receivables valued at ₩13.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩4.38b.
Of course, DGPLtd has a market capitalization of ₩27.1b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since DGPLtd will need earnings to service that debt. 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 DGPLtd had a loss before interest and tax, and actually shrunk its revenue by 30%, to ₩16b. To be frank that doesn't bode well.
Caveat Emptor
Not only did DGPLtd'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 ₩6.9b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₩2.7b of cash over the last year. So suffice it to say we consider the stock very 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 2 warning signs with DGPLtd (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.
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. 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.
About KOSDAQ:A060900
Flawless balance sheet very low.
