Is Daemyung SonoseasonLtd (KOSDAQ:007720) Using Debt Sensibly?

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.' 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. As with many other companies Daemyung Sonoseason Co.,Ltd. (KOSDAQ:007720) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Daemyung SonoseasonLtd

What Is Daemyung SonoseasonLtd's Net Debt?

As you can see below, at the end of September 2020, Daemyung SonoseasonLtd had ₩31.2b of debt, up from ₩29.6b a year ago. Click the image for more detail. But on the other hand it also has ₩134.3b in cash, leading to a ₩103.0b net cash position.

How Strong Is Daemyung SonoseasonLtd's Balance Sheet?

The latest balance sheet data shows that Daemyung SonoseasonLtd had liabilities of ₩57.1b due within a year, and liabilities of ₩3.66b falling due after that. Offsetting these obligations, it had cash of ₩134.3b as well as receivables valued at ₩26.1b due within 12 months. So it actually has ₩99.6b more liquid assets than total liabilities.

This excess liquidity is a great indication that Daemyung SonoseasonLtd's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Daemyung SonoseasonLtd has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Daemyung SonoseasonLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Daemyung SonoseasonLtd had a loss before interest and tax, and actually shrunk its revenue by 24%, to ₩163b. To be frank that doesn't bode well.

So How Risky Is Daemyung SonoseasonLtd?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Daemyung SonoseasonLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩27b of cash and made a loss of ₩65b. Given it only has net cash of ₩103.0b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Daemyung SonoseasonLtd that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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