We Think Dongkuk Industries (KOSDAQ:005160) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Dongkuk Industries Co., Ltd. (KOSDAQ:005160) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dongkuk Industries

How Much Debt Does Dongkuk Industries Carry?

As you can see below, Dongkuk Industries had ₩65.9b of debt at December 2020, down from ₩77.0b a year prior. However, its balance sheet shows it holds ₩144.3b in cash, so it actually has ₩78.4b net cash.

A Look At Dongkuk Industries' Liabilities

We can see from the most recent balance sheet that Dongkuk Industries had liabilities of ₩168.1b falling due within a year, and liabilities of ₩43.3b due beyond that. Offsetting these obligations, it had cash of ₩144.3b as well as receivables valued at ₩97.3b due within 12 months. So it can boast ₩30.2b more liquid assets than total liabilities.

This surplus suggests that Dongkuk Industries has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Dongkuk Industries has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Dongkuk Industries's load is not too heavy, because its EBIT was down 42% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dongkuk Industries'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. 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. Happily for any shareholders, Dongkuk Industries actually produced more free cash flow than EBIT over the last three years. 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 we empathize with investors who find debt concerning, you should keep in mind that Dongkuk Industries has net cash of ₩78.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩92b, being 160% of its EBIT. So we are not troubled with Dongkuk Industries's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Dongkuk Industries (1 shouldn't be ignored!) that you should be aware of before investing here.

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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