These 4 Measures Indicate That Dongwha Pharm.Co.Ltd (KRX:000020) Is Using Debt Safely

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 note that Dongwha Pharm.Co.,Ltd (KRX:000020) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dongwha Pharm.Co.Ltd

What Is Dongwha Pharm.Co.Ltd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Dongwha Pharm.Co.Ltd had debt of ₩9.80b, up from none in one year. However, its balance sheet shows it holds ₩136.2b in cash, so it actually has ₩126.4b net cash.

A Look At Dongwha Pharm.Co.Ltd's Liabilities

We can see from the most recent balance sheet that Dongwha Pharm.Co.Ltd had liabilities of ₩67.4b falling due within a year, and liabilities of ₩23.7b due beyond that. Offsetting these obligations, it had cash of ₩136.2b as well as receivables valued at ₩69.5b due within 12 months. So it can boast ₩114.6b more liquid assets than total liabilities.

This surplus suggests that Dongwha Pharm.Co.Ltd is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Dongwha Pharm.Co.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Dongwha Pharm.Co.Ltd grew its EBIT by 332% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Dongwha Pharm.Co.Ltd'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. Dongwha Pharm.Co.Ltd 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. During the last three years, Dongwha Pharm.Co.Ltd produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Dongwha Pharm.Co.Ltd has net cash of ₩126.4b, as well as more liquid assets than liabilities. And we liked the look of last year's 332% year-on-year EBIT growth. So we don't think Dongwha Pharm.Co.Ltd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Dongwha Pharm.Co.Ltd (1 shouldn't be ignored!) that you should be aware of before investing here.

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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