These 4 Measures Indicate That Dongil IndustriesLtd (KRX:004890) Is Using Debt Safely

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, Dongil Industries Co.,Ltd. (KRX:004890) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dongil IndustriesLtd

How Much Debt Does Dongil IndustriesLtd Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Dongil IndustriesLtd had debt of ₩8.00b, up from ₩3.00b in one year. However, it does have ₩139.7b in cash offsetting this, leading to net cash of ₩131.7b.

How Healthy Is Dongil IndustriesLtd's Balance Sheet?

We can see from the most recent balance sheet that Dongil IndustriesLtd had liabilities of ₩42.2b falling due within a year, and liabilities of ₩14.8b due beyond that. Offsetting this, it had ₩139.7b in cash and ₩74.7b in receivables that were due within 12 months. So it can boast ₩157.3b more liquid assets than total liabilities.

This luscious liquidity implies that Dongil IndustriesLtd's balance sheet is sturdy like a giant sequoia tree. 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.

Although Dongil IndustriesLtd made a loss at the EBIT level, last year, it was also good to see that it generated ₩2.0b in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dongil IndustriesLtd'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 Dongil IndustriesLtd 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. Happily for any shareholders, Dongil IndustriesLtd actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Dongil IndustriesLtd has ₩131.7b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 744% of that EBIT to free cash flow, bringing in ₩15b. So we don't think Dongil IndustriesLtd's use of debt is risky. 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. For instance, we've identified 3 warning signs for Dongil IndustriesLtd (1 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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