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.' 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. We can see that Daemyung Sonoseason Co.,Ltd. (KOSDAQ:007720) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
How Much Debt Does Daemyung SonoseasonLtd Carry?
The chart below, which you can click on for greater detail, shows that Daemyung SonoseasonLtd had ₩29.8b in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds ₩143.3b in cash, so it actually has ₩113.5b net cash.
A Look At Daemyung SonoseasonLtd's Liabilities
We can see from the most recent balance sheet that Daemyung SonoseasonLtd had liabilities of ₩63.9b falling due within a year, and liabilities of ₩3.91b due beyond that. Offsetting this, it had ₩143.3b in cash and ₩19.0b in receivables that were due within 12 months. So it actually has ₩94.5b 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Daemyung SonoseasonLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 36%, to ₩129b. That makes us nervous, to say the least.
So How Risky Is Daemyung SonoseasonLtd?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Daemyung SonoseasonLtd had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩18b and booked a ₩2.2b accounting loss. Given it only has net cash of ₩113.5b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should be aware of the 1 warning sign we've spotted with Daemyung SonoseasonLtd .
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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