Daesung Microbiological Labs (KOSDAQ:036480) Is Carrying A Fair Bit Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Daesung Microbiological Labs. Co., Ltd. (KOSDAQ:036480) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Daesung Microbiological Labs

How Much Debt Does Daesung Microbiological Labs Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Daesung Microbiological Labs had debt of ₩23.0b, up from ₩22.0b in one year. On the flip side, it has ₩10.2b in cash leading to net debt of about ₩12.8b.

How Strong Is Daesung Microbiological Labs' Balance Sheet?

According to the last reported balance sheet, Daesung Microbiological Labs had liabilities of ₩10.7b due within 12 months, and liabilities of ₩15.4b due beyond 12 months. Offsetting these obligations, it had cash of ₩10.2b as well as receivables valued at ₩4.12b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩11.7b.

This deficit isn't so bad because Daesung Microbiological Labs is worth ₩34.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Daesung Microbiological Labs 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.

In the last year Daesung Microbiological Labs wasn't profitable at an EBIT level, but managed to grow its revenue by 2.2%, to ₩25b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Daesung Microbiological Labs had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩1.3b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩1.2b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Daesung Microbiological Labs has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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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