We Think DRGEM (KOSDAQ:263690) Can Stay On Top Of Its Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies DRGEM Corporation (KOSDAQ:263690) makes use of debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for DRGEM

How Much Debt Does DRGEM Carry?

As you can see below, at the end of September 2020, DRGEM had ₩5.00b of debt, up from ₩1.12b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩12.3b in cash, so it actually has ₩7.32b net cash.

How Healthy Is DRGEM's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DRGEM had liabilities of ₩15.8b due within 12 months and liabilities of ₩6.51b due beyond that. Offsetting these obligations, it had cash of ₩12.3b as well as receivables valued at ₩10.2b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that DRGEM's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩177.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, DRGEM boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that DRGEM grew its EBIT by 437% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is DRGEM's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While DRGEM 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 three years, DRGEM created free cash flow amounting to 16% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case DRGEM has ₩7.32b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 437% over the last year. So is DRGEM's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 1 warning sign for DRGEM you should be aware of.

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. 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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