Is Duksung (KRX:004830) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Duksung Co., Ltd. (KRX:004830) 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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Duksung

What Is Duksung's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Duksung had ₩29.7b of debt, an increase on ₩26.6b, over one year. But it also has ₩33.1b in cash to offset that, meaning it has ₩3.42b net cash.

How Strong Is Duksung's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Duksung had liabilities of ₩22.3b due within 12 months and liabilities of ₩20.4b due beyond that. Offsetting these obligations, it had cash of ₩33.1b as well as receivables valued at ₩21.7b due within 12 months. So it can boast ₩12.1b more liquid assets than total liabilities.

This short term liquidity is a sign that Duksung could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Duksung has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Duksung's EBIT dived 19%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Duksung'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, 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 57% 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 ₩3.42b, as well as more liquid assets than liabilities. So we are not troubled with Duksung's debt use. 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. We've identified 3 warning signs with Duksung (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.