DongKook Pharmaceutical (KOSDAQ:086450) Seems To Use Debt Quite Sensibly

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, DongKook Pharmaceutical Co., Ltd. (KOSDAQ:086450) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for DongKook Pharmaceutical

How Much Debt Does DongKook Pharmaceutical Carry?

You can click the graphic below for the historical numbers, but it shows that DongKook Pharmaceutical had ₩60.7b of debt in September 2020, down from ₩68.3b, one year before. But on the other hand it also has ₩172.6b in cash, leading to a ₩111.9b net cash position.

How Strong Is DongKook Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that DongKook Pharmaceutical had liabilities of ₩141.9b due within a year, and liabilities of ₩84.4b falling due after that. Offsetting these obligations, it had cash of ₩172.6b as well as receivables valued at ₩139.5b due within 12 months. So it actually has ₩85.8b more liquid assets than total liabilities.

This short term liquidity is a sign that DongKook Pharmaceutical could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that DongKook Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that DongKook Pharmaceutical has boosted its EBIT by 39%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DongKook Pharmaceutical 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. DongKook Pharmaceutical 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. In the last three years, DongKook Pharmaceutical created free cash flow amounting to 7.8% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that DongKook Pharmaceutical has net cash of ₩111.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 39% year-on-year EBIT growth. So is DongKook Pharmaceutical's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in DongKook Pharmaceutical, 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.

When trading DongKook Pharmaceutical or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.