Health Check: How Prudently Does Dongil IndustriesLtd (KRX:004890) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Dongil Industries Co.,Ltd. (KRX:004890) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dongil IndustriesLtd

How Much Debt Does Dongil IndustriesLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Dongil IndustriesLtd had ₩6.00b of debt, an increase on ₩300.0m, over one year. But it also has ₩144.2b in cash to offset that, meaning it has ₩138.2b net cash.

How Healthy Is Dongil IndustriesLtd's Balance Sheet?

According to the last reported balance sheet, Dongil IndustriesLtd had liabilities of ₩33.6b due within 12 months, and liabilities of ₩14.4b due beyond 12 months. Offsetting this, it had ₩144.2b in cash and ₩69.8b in receivables that were due within 12 months. So it actually has ₩166.0b more liquid assets than total liabilities.

This surplus liquidity suggests that Dongil IndustriesLtd'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. Simply put, the fact that Dongil IndustriesLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dongil IndustriesLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Dongil IndustriesLtd had a loss before interest and tax, and actually shrunk its revenue by 12%, to ₩327b. That's not what we would hope to see.

So How Risky Is Dongil IndustriesLtd?

Although Dongil IndustriesLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩2.6b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Dongil IndustriesLtd has 4 warning signs (and 1 which doesn't sit too well with us) we think 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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