Here's Why Dongil Metal (KOSDAQ:109860) Can Manage Its Debt Responsibly

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.' 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. We can see that Dongil Metal Co., Ltd. (KOSDAQ:109860) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. 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.

See our latest analysis for Dongil Metal

What Is Dongil Metal's Net Debt?

The image below, which you can click on for greater detail, shows that Dongil Metal had debt of ₩3.50b at the end of December 2020, a reduction from ₩4.74b over a year. However, it does have ₩15.9b in cash offsetting this, leading to net cash of ₩12.4b.

How Strong Is Dongil Metal's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dongil Metal had liabilities of ₩8.83b due within 12 months and liabilities of ₩3.21b due beyond that. Offsetting these obligations, it had cash of ₩15.9b as well as receivables valued at ₩5.50b due within 12 months. So it actually has ₩9.33b more liquid assets than total liabilities.

This surplus suggests that Dongil Metal has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Dongil Metal has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Dongil Metal if management cannot prevent a repeat of the 74% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dongil Metal'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Dongil Metal 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. Over the last three years, Dongil Metal actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Dongil Metal has ₩12.4b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩7.5b, being 118% of its EBIT. So we don't have any problem with Dongil Metal's use of debt. 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. To that end, you should be aware of the 4 warning signs we've spotted with Dongil Metal .

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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