Is Duksan Hi MetalLtd (KOSDAQ:077360) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Duksan Hi Metal Co.,Ltd (KOSDAQ:077360) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Duksan Hi MetalLtd

How Much Debt Does Duksan Hi MetalLtd Carry?

As you can see below, at the end of March 2024, Duksan Hi MetalLtd had ₩254.0b of debt, up from ₩38.5b a year ago. Click the image for more detail. However, it also had ₩72.5b in cash, and so its net debt is ₩181.6b.

How Healthy Is Duksan Hi MetalLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Duksan Hi MetalLtd had liabilities of ₩101.2b due within 12 months and liabilities of ₩220.8b due beyond that. Offsetting this, it had ₩72.5b in cash and ₩60.5b in receivables that were due within 12 months. So its liabilities total ₩189.0b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩305.8b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Duksan Hi MetalLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Duksan Hi MetalLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 2.0%, to ₩168b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Duksan Hi MetalLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩7.7b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₩6.3b. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Duksan Hi MetalLtd 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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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.

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