Does Daihan PharmaceuticalLtd (KOSDAQ:023910) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Daihan Pharmaceutical Co.,Ltd. (KOSDAQ:023910) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Daihan PharmaceuticalLtd

What Is Daihan PharmaceuticalLtd's Debt?

As you can see below, Daihan PharmaceuticalLtd had ₩29.5b of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩71.2b in cash offsetting this, leading to net cash of ₩41.7b.

A Look At Daihan PharmaceuticalLtd's Liabilities

The latest balance sheet data shows that Daihan PharmaceuticalLtd had liabilities of ₩41.8b due within a year, and liabilities of ₩35.7b falling due after that. On the other hand, it had cash of ₩71.2b and ₩30.0b worth of receivables due within a year. So it actually has ₩23.8b more liquid assets than total liabilities.

This surplus suggests that Daihan PharmaceuticalLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Daihan PharmaceuticalLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Daihan PharmaceuticalLtd saw its EBIT decline by 6.8% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Daihan PharmaceuticalLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Daihan PharmaceuticalLtd 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. Looking at the most recent three years, Daihan PharmaceuticalLtd recorded free cash flow of 35% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Daihan PharmaceuticalLtd has ₩41.7b in net cash and a decent-looking balance sheet. So we are not troubled with Daihan PharmaceuticalLtd's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Daihan PharmaceuticalLtd's earnings per share history for free.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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