Dong-A ST (KRX:170900) Has A Rock Solid Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Dong-A ST Co., Ltd. (KRX:170900) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Dong-A ST

How Much Debt Does Dong-A ST Carry?

As you can see below, Dong-A ST had ₩201.6b of debt at September 2020, down from ₩250.4b a year prior. But it also has ₩293.8b in cash to offset that, meaning it has ₩92.1b net cash.

A Look At Dong-A ST's Liabilities

The latest balance sheet data shows that Dong-A ST had liabilities of ₩147.9b due within a year, and liabilities of ₩194.6b falling due after that. Offsetting these obligations, it had cash of ₩293.8b as well as receivables valued at ₩101.9b due within 12 months. So it actually has ₩53.1b more liquid assets than total liabilities.

This surplus suggests that Dong-A ST has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Dong-A ST boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Dong-A ST grew its EBIT by 5.3% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dong-A ST's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Dong-A ST 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. Over the most recent three years, Dong-A ST recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Dong-A ST has ₩92.1b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 69% of that EBIT to free cash flow, bringing in ₩15b. So is Dong-A ST's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Dong-A ST is showing 1 warning sign in our investment analysis , 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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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.
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