Daebongls.Co.Ltd (KOSDAQ:078140) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Daebongls.Co.,Ltd. (KOSDAQ:078140) does carry debt. 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Daebongls.Co.Ltd

How Much Debt Does Daebongls.Co.Ltd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Daebongls.Co.Ltd had ₩46.0b of debt, an increase on ₩28.6b, over one year. But it also has ₩80.7b in cash to offset that, meaning it has ₩34.8b net cash.

How Healthy Is Daebongls.Co.Ltd's Balance Sheet?

We can see from the most recent balance sheet that Daebongls.Co.Ltd had liabilities of ₩25.9b falling due within a year, and liabilities of ₩35.1b due beyond that. Offsetting this, it had ₩80.7b in cash and ₩26.0b in receivables that were due within 12 months. So it can boast ₩45.7b more liquid assets than total liabilities.

This surplus strongly suggests that Daebongls.Co.Ltd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Daebongls.Co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Daebongls.Co.Ltd grew its EBIT by 114% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Daebongls.Co.Ltd 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Daebongls.Co.Ltd 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. Over the last three years, Daebongls.Co.Ltd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Daebongls.Co.Ltd has net cash of ₩34.8b, as well as more liquid assets than liabilities. And we liked the look of last year's 114% year-on-year EBIT growth. So is Daebongls.Co.Ltd's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Daebongls.Co.Ltd's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.