Here's Why Daihan PharmaceuticalLtd (KOSDAQ:023910) Can Manage Its Debt Responsibly

Warren Buffett famously said, '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. We can see that Daihan Pharmaceutical Co.,Ltd. (KOSDAQ:023910) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Daihan PharmaceuticalLtd

How Much Debt Does Daihan PharmaceuticalLtd Carry?

The chart below, which you can click on for greater detail, shows that Daihan PharmaceuticalLtd had ₩29.0b in debt in September 2020; about the same as the year before. However, it does have ₩71.9b in cash offsetting this, leading to net cash of ₩42.9b.

A Look At Daihan PharmaceuticalLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Daihan PharmaceuticalLtd had liabilities of ₩38.8b due within 12 months and liabilities of ₩34.5b due beyond that. Offsetting these obligations, it had cash of ₩71.9b as well as receivables valued at ₩31.3b due within 12 months. So it can boast ₩29.9b more liquid assets than total liabilities.

This short term liquidity is a sign that Daihan PharmaceuticalLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Daihan PharmaceuticalLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Daihan PharmaceuticalLtd's EBIT dived 10%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is Daihan PharmaceuticalLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Daihan PharmaceuticalLtd has ₩42.9b in net cash and a decent-looking balance sheet. So we don't have any problem with Daihan PharmaceuticalLtd's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Daihan PharmaceuticalLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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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