We Think Daebongls.Co.Ltd (KOSDAQ:078140) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Daebongls.Co.,Ltd. (KOSDAQ:078140) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Daebongls.Co.Ltd

What Is Daebongls.Co.Ltd's Net Debt?

The chart below, which you can click on for greater detail, shows that Daebongls.Co.Ltd had ₩5.19b in debt in December 2020; about the same as the year before. However, it does have ₩70.9b in cash offsetting this, leading to net cash of ₩65.8b.

A Look At Daebongls.Co.Ltd's Liabilities

We can see from the most recent balance sheet that Daebongls.Co.Ltd had liabilities of ₩12.5b falling due within a year, and liabilities of ₩8.77b due beyond that. Offsetting this, it had ₩70.9b in cash and ₩19.6b in receivables that were due within 12 months. So it can boast ₩69.3b 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. Succinctly put, Daebongls.Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Daebongls.Co.Ltd grew its EBIT at 10% over the last year, further increasing its ability to manage debt. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

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. Looking at the most recent three years, Daebongls.Co.Ltd recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Daebongls.Co.Ltd has ₩65.8b in net cash and a decent-looking balance sheet. On top of that, it increased its EBIT by 10% in the last twelve months. So is Daebongls.Co.Ltd's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Daebongls.Co.Ltd that you should be aware of before investing here.

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. 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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