Is Daewon Media (KOSDAQ:048910) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Daewon Media Co., Ltd. (KOSDAQ:048910) makes use of debt. But the real question is whether this debt is making the company risky.

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Daewon Media

What Is Daewon Media's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Daewon Media had ₩6.98b of debt, an increase on ₩5.69b, over one year. But it also has ₩20.0b in cash to offset that, meaning it has ₩13.0b net cash.

A Look At Daewon Media's Liabilities

We can see from the most recent balance sheet that Daewon Media had liabilities of ₩32.1b falling due within a year, and liabilities of ₩6.60b due beyond that. Offsetting these obligations, it had cash of ₩20.0b as well as receivables valued at ₩15.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩3.69b.

Of course, Daewon Media has a market capitalization of ₩145.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Daewon Media also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Daewon Media grew its EBIT by 32% 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 ultimately the future profitability of the business will decide if Daewon Media can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Daewon Media 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. During the last three years, Daewon Media burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

We could understand if investors are concerned about Daewon Media's liabilities, but we can be reassured by the fact it has has net cash of ₩13.0b. And it impressed us with its EBIT growth of 32% over the last year. So we are not troubled with Daewon Media's debt use. 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. To that end, you should be aware of the 1 warning sign we've spotted with Daewon Media .

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. 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.
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