Is Daebongls.Co.Ltd (KOSDAQ:078140) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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 A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 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 March 2024 Daebongls.Co.Ltd had ₩31.4b of debt, an increase on ₩22.4b, over one year. However, its balance sheet shows it holds ₩68.8b in cash, so it actually has ₩37.5b 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 ₩42.5b falling due within a year, and liabilities of ₩649.1m due beyond that. On the other hand, it had cash of ₩68.8b and ₩26.2b worth of receivables due within a year. So it can boast ₩51.9b more liquid assets than total liabilities.

This surplus liquidity suggests that Daebongls.Co.Ltd's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Daebongls.Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact Daebongls.Co.Ltd's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. 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 Daebongls.Co.Ltd'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, 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. In the last three years, Daebongls.Co.Ltd created free cash flow amounting to 2.4% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Daebongls.Co.Ltd has ₩37.5b in net cash and a decent-looking balance sheet. So we don't have any problem with Daebongls.Co.Ltd's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Daebongls.Co.Ltd you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com