Is DE&T (KOSDAQ:079810) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies DE&T Co., Ltd. (KOSDAQ:079810) makes use of debt. But should shareholders be worried about its use of debt?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out 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 ₩28.4b at the end of March 2024, a reduction from ₩39.9b over a year. But on the other hand it also has ₩96.7b in cash, leading to a ₩68.3b net cash position.

How Healthy Is DE&T's Balance Sheet?

According to the last reported balance sheet, DE&T had liabilities of ₩81.1b due within 12 months, and liabilities of ₩5.84b due beyond 12 months. Offsetting these obligations, it had cash of ₩96.7b as well as receivables valued at ₩37.6b due within 12 months. So it can boast ₩47.4b more liquid assets than total liabilities.

This surplus suggests that DE&T is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that DE&T has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, DE&T turned things around in the last 12 months, delivering and EBIT of ₩5.2b. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DE&T's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While DE&T 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, DE&T saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case DE&T has ₩68.3b in net cash and a decent-looking balance sheet. So we are not troubled with DE&T's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for DE&T (1 is concerning) 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.