Daeyang Paper Mfg (KOSDAQ:006580) Is Carrying A Fair Bit Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Daeyang Paper Mfg. Co., Ltd. (KOSDAQ:006580) makes use of debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Daeyang Paper Mfg

How Much Debt Does Daeyang Paper Mfg Carry?

As you can see below, Daeyang Paper Mfg had ₩54.7b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩33.6b in cash offsetting this, leading to net debt of about ₩21.1b.

How Healthy Is Daeyang Paper Mfg's Balance Sheet?

We can see from the most recent balance sheet that Daeyang Paper Mfg had liabilities of ₩59.3b falling due within a year, and liabilities of ₩20.0b due beyond that. Offsetting these obligations, it had cash of ₩33.6b as well as receivables valued at ₩23.5b due within 12 months. So it has liabilities totalling ₩22.1b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Daeyang Paper Mfg has a market capitalization of ₩102.7b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Daeyang Paper Mfg's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Daeyang Paper Mfg wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to ₩150b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Daeyang Paper Mfg's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₩4.3b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩948m. So we do think this stock is quite risky. 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. Be aware that Daeyang Paper Mfg is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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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