Is Maeil Dairies (KOSDAQ:267980) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Maeil Dairies Co., Ltd. (KOSDAQ:267980) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Maeil Dairies

What Is Maeil Dairies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Maeil Dairies had ₩99.8b of debt, an increase on ₩86.9b, over one year. But on the other hand it also has ₩109.7b in cash, leading to a ₩9.88b net cash position.

How Strong Is Maeil Dairies' Balance Sheet?

The latest balance sheet data shows that Maeil Dairies had liabilities of ₩212.5b due within a year, and liabilities of ₩93.3b falling due after that. Offsetting this, it had ₩109.7b in cash and ₩180.8b in receivables that were due within 12 months. So its liabilities total ₩15.4b more than the combination of its cash and short-term receivables.

Given Maeil Dairies has a market capitalization of ₩535.2b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Maeil Dairies also has more cash than debt, so we're pretty confident it can manage its debt safely.

Maeil Dairies's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Maeil Dairies's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Maeil Dairies has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last two years, Maeil Dairies's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Maeil Dairies has ₩9.88b in net cash. So we don't have any problem with Maeil Dairies's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Maeil Dairies that 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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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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