Daebongls.Co.Ltd (KOSDAQ:078140) Has A Rock Solid Balance Sheet

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.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for Daebongls.Co.Ltd

How Much Debt Does Daebongls.Co.Ltd Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Daebongls.Co.Ltd had debt of ₩5.22b, up from ₩358.8m in one year. But it also has ₩65.4b in cash to offset that, meaning it has ₩60.2b net cash.

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

The latest balance sheet data shows that Daebongls.Co.Ltd had liabilities of ₩12.6b due within a year, and liabilities of ₩9.66b falling due after that. Offsetting this, it had ₩65.4b in cash and ₩22.6b in receivables that were due within 12 months. So it can boast ₩65.7b more liquid assets than total liabilities.

This excess liquidity is a great indication that Daebongls.Co.Ltd's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. 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.

In addition to that, we're happy to report that Daebongls.Co.Ltd has boosted its EBIT by 34%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Daebongls.Co.Ltd 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. Looking at the most recent three years, Daebongls.Co.Ltd recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Daebongls.Co.Ltd has net cash of ₩60.2b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 34% over the last year. So we don't think Daebongls.Co.Ltd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Daebongls.Co.Ltd 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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