Is Daewon Media (KOSDAQ:048910) Using Too Much Debt?

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.' 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. Importantly, Daewon Media Co., Ltd. (KOSDAQ:048910) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Daewon Media

How Much Debt Does Daewon Media Carry?

You can click the graphic below for the historical numbers, but it shows that Daewon Media had ₩15.0b of debt in September 2024, down from ₩15.8b, one year before. However, its balance sheet shows it holds ₩37.6b in cash, so it actually has ₩22.6b net cash.

How Healthy Is Daewon Media's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Daewon Media had liabilities of ₩52.5b due within 12 months and liabilities of ₩7.16b due beyond that. On the other hand, it had cash of ₩37.6b and ₩20.7b worth of receivables due within a year. So its liabilities total ₩1.35b more than the combination of its cash and short-term receivables.

Having regard to Daewon Media's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩96.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Shareholders should be aware that Daewon Media's EBIT was down 63% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Daewon Media 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, Daewon Media produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Daewon Media has ₩22.6b in net cash. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in ₩11b. So we are not troubled with Daewon Media's debt use. 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 2 warning signs we've spotted with Daewon Media .

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.