Is Iljin DiamondLtd (KRX:081000) Weighed On By Its Debt Load?

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. Importantly, Iljin Diamond Co.,Ltd (KRX:081000) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 Iljin DiamondLtd

What Is Iljin DiamondLtd's Debt?

The image below, which you can click on for greater detail, shows that Iljin DiamondLtd had debt of ₩17.7b at the end of March 2024, a reduction from ₩21.9b over a year. However, its balance sheet shows it holds ₩373.1b in cash, so it actually has ₩355.3b net cash.

A Look At Iljin DiamondLtd's Liabilities

The latest balance sheet data shows that Iljin DiamondLtd had liabilities of ₩40.1b due within a year, and liabilities of ₩23.2b falling due after that. On the other hand, it had cash of ₩373.1b and ₩28.6b worth of receivables due within a year. So it actually has ₩338.3b more liquid assets than total liabilities.

This surplus strongly suggests that Iljin DiamondLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Iljin DiamondLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Iljin DiamondLtd 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.

In the last year Iljin DiamondLtd had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₩141b. That makes us nervous, to say the least.

So How Risky Is Iljin DiamondLtd?

While Iljin DiamondLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩9.3b. 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. There's no doubt the next few years will be crucial to how the business matures. 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. Case in point: We've spotted 3 warning signs for Iljin DiamondLtd you should be aware of, and 1 of them shouldn't be ignored.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com