Health Check: How Prudently Does Dragonfly GF (KOSDAQ:030350) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Dragonfly GF Co., Ltd (KOSDAQ:030350) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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.

See our latest analysis for Dragonfly GF

What Is Dragonfly GF's Net Debt?

As you can see below, Dragonfly GF had ₩2.90b of debt at March 2024, down from ₩3.18b a year prior. But it also has ₩3.26b in cash to offset that, meaning it has ₩355.7m net cash.

How Strong Is Dragonfly GF's Balance Sheet?

According to the last reported balance sheet, Dragonfly GF had liabilities of ₩8.64b due within 12 months, and liabilities of ₩740.1m due beyond 12 months. Offsetting this, it had ₩3.26b in cash and ₩4.11b in receivables that were due within 12 months. So its liabilities total ₩2.01b more than the combination of its cash and short-term receivables.

Given Dragonfly GF has a market capitalization of ₩34.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Dragonfly GF 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 Dragonfly GF will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Dragonfly GF reported revenue of ₩26b, which is a gain of 226%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Dragonfly GF?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Dragonfly GF had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩8.1b and booked a ₩29b accounting loss. Given it only has net cash of ₩355.7m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Dragonfly GF has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 4 warning signs for Dragonfly GF (2 are significant) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.