We Think Daehan Steel (KRX:084010) Can Manage Its Debt With Ease

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.' 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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Daehan Steel

How Much Debt Does Daehan Steel Carry?

As you can see below, Daehan Steel had ₩54.6b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩155.9b in cash to offset that, meaning it has ₩101.3b net cash.

A Look At Daehan Steel's Liabilities

Zooming in on the latest balance sheet data, we can see that Daehan Steel had liabilities of ₩277.7b due within 12 months and liabilities of ₩36.8b due beyond that. Offsetting these obligations, it had cash of ₩155.9b as well as receivables valued at ₩159.8b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Daehan Steel's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩238.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Daehan Steel boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Daehan Steel grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. Daehan Steel may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Daehan Steel generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Daehan Steel has ₩101.3b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in ₩69b. So is Daehan Steel's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Daehan Steel .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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