Dongwoo Farm To TableLtd (KOSDAQ:088910) Has Debt But No Earnings; Should You Worry?

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 can see that Dongwoo Farm To Table Co.,Ltd (KOSDAQ:088910) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Dongwoo Farm To TableLtd

What Is Dongwoo Farm To TableLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Dongwoo Farm To TableLtd had ₩2.76b of debt, an increase on ₩1.19b, over one year. However, it does have ₩50.9b in cash offsetting this, leading to net cash of ₩48.1b.

How Strong Is Dongwoo Farm To TableLtd's Balance Sheet?

The latest balance sheet data shows that Dongwoo Farm To TableLtd had liabilities of ₩23.9b due within a year, and liabilities of ₩7.51b falling due after that. Offsetting these obligations, it had cash of ₩50.9b as well as receivables valued at ₩18.5b due within 12 months. So it can boast ₩37.9b more liquid assets than total liabilities.

This excess liquidity is a great indication that Dongwoo Farm To TableLtd's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that Dongwoo Farm To TableLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dongwoo Farm To TableLtd 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 Dongwoo Farm To TableLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 4.3%, to ₩277b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Dongwoo Farm To TableLtd?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Dongwoo Farm To TableLtd had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩14b and booked a ₩6.4b accounting loss. Given it only has net cash of ₩48.1b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Dongwoo Farm To TableLtd that you should be aware of before investing here.

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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