Is Dongwoo Farm To TableLtd (KOSDAQ:088910) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Dongwoo Farm To Table Co.,Ltd (KOSDAQ:088910) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Dongwoo Farm To TableLtd

What Is Dongwoo Farm To TableLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Dongwoo Farm To TableLtd had ₩40.1b of debt, an increase on ₩1.19b, over one year. However, its balance sheet shows it holds ₩59.8b in cash, so it actually has ₩19.7b net cash.

A Look At Dongwoo Farm To TableLtd's Liabilities

We can see from the most recent balance sheet that Dongwoo Farm To TableLtd had liabilities of ₩26.0b falling due within a year, and liabilities of ₩43.0b due beyond that. Offsetting these obligations, it had cash of ₩59.8b as well as receivables valued at ₩19.3b due within 12 months. So it actually has ₩10.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Dongwoo Farm To TableLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. 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. There's no doubt that we learn most about debt from the balance sheet. 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 2.1%, to ₩276b. 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Dongwoo Farm To TableLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩16b of cash and made a loss of ₩2.4b. Given it only has net cash of ₩19.7b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. For example, we've discovered 1 warning sign for Dongwoo Farm To TableLtd that you should be aware of before investing here.

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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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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