Health Check: How Prudently Does Daegu Department Store (KRX:006370) Use Debt?

Warren Buffett famously said, '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. Importantly, Daegu Department Store Co., Ltd. (KRX:006370) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Daegu Department Store

What Is Daegu Department Store's Net Debt?

As you can see below, at the end of December 2023, Daegu Department Store had ₩237.2b of debt, up from ₩201.3b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩9.13b, its net debt is less, at about ₩228.1b.

How Strong Is Daegu Department Store's Balance Sheet?

The latest balance sheet data shows that Daegu Department Store had liabilities of ₩137.7b due within a year, and liabilities of ₩132.3b falling due after that. Offsetting these obligations, it had cash of ₩9.13b as well as receivables valued at ₩6.29b due within 12 months. So its liabilities total ₩254.6b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩62.7b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Daegu Department Store would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Daegu Department Store'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 Daegu Department Store had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₩68b. We would much prefer see growth.

Caveat Emptor

While Daegu Department Store's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩15b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through ₩27b in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Daegu Department Store (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.