We Think Dong Yang Steel Pipe (KRX:008970) Can Manage Its Debt With Ease

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Dong Yang Steel Pipe Co., Ltd. (KRX:008970) does use debt in its business. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Dong Yang Steel Pipe's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Dong Yang Steel Pipe had ₩45.8b of debt in December 2024, down from ₩53.6b, one year before. However, because it has a cash reserve of ₩38.0b, its net debt is less, at about ₩7.80b.

A Look At Dong Yang Steel Pipe's Liabilities

The latest balance sheet data shows that Dong Yang Steel Pipe had liabilities of ₩63.8b due within a year, and liabilities of ₩20.5b falling due after that. On the other hand, it had cash of ₩38.0b and ₩36.4b worth of receivables due within a year. So its liabilities total ₩9.89b more than the combination of its cash and short-term receivables.

Given Dong Yang Steel Pipe has a market capitalization of ₩281.9b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

View our latest analysis for Dong Yang Steel Pipe

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Given net debt is only 0.60 times EBITDA, it is initially surprising to see that Dong Yang Steel Pipe's EBIT has low interest coverage of 1.9 times. So one way or the other, it's clear the debt levels are not trivial. Pleasingly, Dong Yang Steel Pipe is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 219% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Dong Yang Steel Pipe 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Dong Yang Steel Pipe actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Happily, Dong Yang Steel Pipe's impressive conversion of EBIT to free cash flow implies it has the upper hand on its debt. But the stark truth is that we are concerned by its interest cover. Looking at the bigger picture, we think Dong Yang Steel Pipe's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Dong Yang Steel Pipe that 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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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.