Is Daedong Steel (KOSDAQ:048470) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Daedong Steel Co., Ltd. (KOSDAQ:048470) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Daedong Steel

What Is Daedong Steel's Net Debt?

The image below, which you can click on for greater detail, shows that Daedong Steel had debt of ₩4.40b at the end of June 2024, a reduction from ₩8.91b over a year. However, it does have ₩33.9b in cash offsetting this, leading to net cash of ₩29.5b.

A Look At Daedong Steel's Liabilities

The latest balance sheet data shows that Daedong Steel had liabilities of ₩16.6b due within a year, and liabilities of ₩4.10b falling due after that. On the other hand, it had cash of ₩33.9b and ₩25.5b worth of receivables due within a year. So it actually has ₩38.7b more liquid assets than total liabilities.

This surplus liquidity suggests that Daedong Steel's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Daedong Steel boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Daedong Steel will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Daedong Steel had a loss before interest and tax, and actually shrunk its revenue by 13%, to ₩139b. We would much prefer see growth.

So How Risky Is Daedong Steel?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Daedong Steel had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩9.6b and booked a ₩2.5b accounting loss. But the saving grace is the ₩29.5b on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Daedong Steel is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.