These 4 Measures Indicate That DongKook Pharmaceutical (KOSDAQ:086450) 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. As with many other companies DongKook Pharmaceutical Co., Ltd. (KOSDAQ:086450) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for DongKook Pharmaceutical

What Is DongKook Pharmaceutical's Debt?

As you can see below, at the end of March 2024, DongKook Pharmaceutical had ₩63.5b of debt, up from ₩60.3b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩88.6b in cash, so it actually has ₩25.1b net cash.

A Look At DongKook Pharmaceutical's Liabilities

The latest balance sheet data shows that DongKook Pharmaceutical had liabilities of ₩220.1b due within a year, and liabilities of ₩30.4b falling due after that. Offsetting this, it had ₩88.6b in cash and ₩193.9b in receivables that were due within 12 months. So it can boast ₩32.0b 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. Succinctly put, DongKook Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

While DongKook Pharmaceutical doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. Considering the last three years, DongKook Pharmaceutical actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While it is always sensible to investigate a company's debt, in this case DongKook Pharmaceutical has ₩25.1b in net cash and a decent-looking balance sheet. So we don't have any problem with DongKook Pharmaceutical's use of debt. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.