These 4 Measures Indicate That Daewon Media (KOSDAQ:048910) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Daewon Media Co., Ltd. (KOSDAQ:048910) does use debt in its business. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Daewon Media Carry?

The chart below, which you can click on for greater detail, shows that Daewon Media had ₩15.6b in debt in December 2024; about the same as the year before. But it also has ₩32.8b in cash to offset that, meaning it has ₩17.2b net cash.

How Healthy Is Daewon Media's Balance Sheet?

According to the last reported balance sheet, Daewon Media had liabilities of ₩54.6b due within 12 months, and liabilities of ₩7.80b due beyond 12 months. On the other hand, it had cash of ₩32.8b and ₩27.4b worth of receivables due within a year. So it has liabilities totalling ₩2.22b more than its cash and near-term receivables, combined.

This state of affairs indicates that Daewon Media'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 ₩138.8b 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.

Check out our latest analysis for Daewon Media

Importantly, Daewon Media's EBIT fell a jaw-dropping 89% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Daewon Media's ability to maintain a healthy balance sheet going forward. 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. Over the most recent three years, Daewon Media recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 ₩17.2b in net cash. The cherry on top was that in converted 66% of that EBIT to free cash flow, bringing in ₩612m. 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. Case in point: We've spotted 1 warning sign for Daewon Media you should be aware of.

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.