Warren Buffett famously said, '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 Duksung Co., Ltd. (KRX:004830) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Duksung
How Much Debt Does Duksung Carry?
As you can see below, Duksung had ₩26.3b of debt at March 2024, down from ₩32.9b a year prior. However, it does have ₩30.0b in cash offsetting this, leading to net cash of ₩3.76b.
How Strong Is Duksung's Balance Sheet?
The latest balance sheet data shows that Duksung had liabilities of ₩20.6b due within a year, and liabilities of ₩20.2b falling due after that. Offsetting this, it had ₩30.0b in cash and ₩20.5b in receivables that were due within 12 months. So it can boast ₩9.79b more liquid assets than total liabilities.
This surplus suggests that Duksung has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Duksung boasts net cash, so it's fair to say it does not have a heavy debt load!
In addition to that, we're happy to report that Duksung has boosted its EBIT by 47%, 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 Duksung 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. While Duksung 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. During the last three years, Duksung produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Duksung has net cash of ₩3.76b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 47% over the last year. So we don't think Duksung'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. Be aware that Duksung is showing 1 warning sign in our investment analysis , you should know about...
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. 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.
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About KOSE:A004830
Flawless balance sheet with solid track record.
