We Think DongKook Pharmaceutical (KOSDAQ:086450) Can Stay On Top Of Its 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that DongKook Pharmaceutical Co., Ltd. (KOSDAQ:086450) 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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for DongKook Pharmaceutical

What Is DongKook Pharmaceutical's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 DongKook Pharmaceutical had debt of ₩63.6b, up from ₩58.8b in one year. But it also has ₩176.3b in cash to offset that, meaning it has ₩112.7b net cash.

How Healthy Is DongKook Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, DongKook Pharmaceutical had liabilities of ₩145.0b due within 12 months, and liabilities of ₩62.5b due beyond 12 months. On the other hand, it had cash of ₩176.3b and ₩137.0b worth of receivables due within a year. So it actually has ₩105.8b 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. Succinctly put, DongKook Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that DongKook Pharmaceutical has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine DongKook Pharmaceutical's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While DongKook Pharmaceutical has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, DongKook Pharmaceutical reported free cash flow worth 9.6% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that DongKook Pharmaceutical has net cash of ₩112.7b, as well as more liquid assets than liabilities. And we liked the look of last year's 20% year-on-year EBIT growth. So we are not troubled with DongKook Pharmaceutical's debt use. 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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