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.' 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 can see that DE&T Co., Ltd. (KOSDAQ:079810) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for DE&T
How Much Debt Does DE&T Carry?
The image below, which you can click on for greater detail, shows that DE&T had debt of ₩20.3b at the end of September 2020, a reduction from ₩31.2b over a year. However, it does have ₩13.8b in cash offsetting this, leading to net debt of about ₩6.52b.
How Strong Is DE&T's Balance Sheet?
We can see from the most recent balance sheet that DE&T had liabilities of ₩19.5b falling due within a year, and liabilities of ₩7.93b due beyond that. Offsetting these obligations, it had cash of ₩13.8b as well as receivables valued at ₩9.27b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩4.41b.
Given DE&T has a market capitalization of ₩100.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since DE&T will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year DE&T had a loss before interest and tax, and actually shrunk its revenue by 19%, to ₩27b. That's not what we would hope to see.
Caveat Emptor
While DE&T's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩6.7b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩5.9b of cash over the last year. So in short it's a really risky stock. 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 5 warning signs with DE&T (at least 2 which are potentially serious) , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. 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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About KOSDAQ:A079810
DE&T
Develops, produces, and sells back-end process equipment of the semiconductor and flat panel display industries worldwide.
Excellent balance sheet with questionable track record.