These 4 Measures Indicate That Daemyung SonoseasonLtd (KOSDAQ:007720) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Daemyung Sonoseason Co.,Ltd. (KOSDAQ:007720) does have debt on its balance sheet. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Daemyung SonoseasonLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Daemyung SonoseasonLtd had ₩30.5b of debt, an increase on ₩27.7b, over one year. However, its balance sheet shows it holds ₩42.5b in cash, so it actually has ₩12.0b net cash.

How Healthy Is Daemyung SonoseasonLtd's Balance Sheet?

We can see from the most recent balance sheet that Daemyung SonoseasonLtd had liabilities of ₩44.2b falling due within a year, and liabilities of ₩2.02b due beyond that. Offsetting these obligations, it had cash of ₩42.5b as well as receivables valued at ₩11.7b due within 12 months. So it actually has ₩7.99b more liquid assets than total liabilities.

This short term liquidity is a sign that Daemyung SonoseasonLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Daemyung SonoseasonLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for Daemyung SonoseasonLtd

Notably, Daemyung SonoseasonLtd made a loss at the EBIT level, last year, but improved that to positive EBIT of ₩653m in the last twelve months. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Daemyung SonoseasonLtd 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 year, Daemyung SonoseasonLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Daemyung SonoseasonLtd has ₩12.0b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 1,570% of that EBIT to free cash flow, bringing in ₩10b. So we don't think Daemyung SonoseasonLtd's use of debt is risky. 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. For instance, we've identified 2 warning signs for Daemyung SonoseasonLtd that you should be aware of.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.