Is Daehan Steel (KRX:084010) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Daehan Steel Co., Ltd. (KRX:084010) makes use of debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Daehan Steel Carry?

The image below, which you can click on for greater detail, shows that at March 2025 Daehan Steel had debt of ₩32.3b, up from ₩22.0b in one year. But on the other hand it also has ₩350.6b in cash, leading to a ₩318.3b net cash position.

A Look At Daehan Steel's Liabilities

We can see from the most recent balance sheet that Daehan Steel had liabilities of ₩255.7b falling due within a year, and liabilities of ₩45.2b due beyond that. Offsetting these obligations, it had cash of ₩350.6b as well as receivables valued at ₩157.8b due within 12 months. So it can boast ₩207.5b more liquid assets than total liabilities.

This excess liquidity is a great indication that Daehan Steel's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Daehan Steel has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Daehan Steel

The modesty of its debt load may become crucial for Daehan Steel if management cannot prevent a repeat of the 93% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Daehan Steel's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Daehan Steel 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. Looking at the most recent three years, Daehan Steel recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Daehan Steel has net cash of ₩318.3b, as well as more liquid assets than liabilities. So we don't have any problem with Daehan Steel's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Daehan Steel has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.