Here's Why Dongkuk Industries (KOSDAQ:005160) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Dongkuk Industries Co., Ltd. (KOSDAQ:005160) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Dongkuk Industries

How Much Debt Does Dongkuk Industries Carry?

The image below, which you can click on for greater detail, shows that Dongkuk Industries had debt of ₩82.1b at the end of September 2020, a reduction from ₩104.3b over a year. However, its balance sheet shows it holds ₩160.9b in cash, so it actually has ₩78.8b net cash.

How Strong Is Dongkuk Industries' Balance Sheet?

According to the last reported balance sheet, Dongkuk Industries had liabilities of ₩162.1b due within 12 months, and liabilities of ₩48.3b due beyond 12 months. On the other hand, it had cash of ₩160.9b and ₩90.7b worth of receivables due within a year. So it can boast ₩41.1b more liquid assets than total liabilities.

This excess liquidity suggests that Dongkuk Industries is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Dongkuk Industries boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Dongkuk Industries's saving grace is its low debt levels, because its EBIT has tanked 24% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Dongkuk Industries 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Dongkuk Industries may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Dongkuk Industries actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Dongkuk Industries has ₩78.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩114b, being 174% of its EBIT. So we don't think Dongkuk Industries's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Dongkuk Industries that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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