Is CHUNGDAMGLOBAL (KOSDAQ:362320) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, CHUNGDAMGLOBAL Co., Ltd. (KOSDAQ:362320) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

Check out our latest analysis for CHUNGDAMGLOBAL

How Much Debt Does CHUNGDAMGLOBAL Carry?

As you can see below, at the end of September 2024, CHUNGDAMGLOBAL had ₩49.0b of debt, up from ₩30.5b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩37.0b, its net debt is less, at about ₩11.9b.

How Strong Is CHUNGDAMGLOBAL's Balance Sheet?

We can see from the most recent balance sheet that CHUNGDAMGLOBAL had liabilities of ₩75.8b falling due within a year, and liabilities of ₩20.7b due beyond that. On the other hand, it had cash of ₩37.0b and ₩95.7b worth of receivables due within a year. So it can boast ₩36.2b more liquid assets than total liabilities.

This surplus strongly suggests that CHUNGDAMGLOBAL has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

CHUNGDAMGLOBAL's net debt is sitting at a very reasonable 2.1 times its EBITDA, while its EBIT covered its interest expense just 3.1 times last year. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. Shareholders should be aware that CHUNGDAMGLOBAL's EBIT was down 34% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CHUNGDAMGLOBAL'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, CHUNGDAMGLOBAL burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

While CHUNGDAMGLOBAL's conversion of EBIT to free cash flow makes us cautious about it, its track record of (not) growing its EBIT is no better. But on the brighter side of life, its level of total liabilities leaves us feeling more frolicsome. Taking the abovementioned factors together we do think CHUNGDAMGLOBAL's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. 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. Be aware that CHUNGDAMGLOBAL is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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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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.