DSK (KOSDAQ:109740) Has Debt But No Earnings; Should You Worry?

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. We note that DSK Co., Ltd. (KOSDAQ:109740) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for DSK

How Much Debt Does DSK Carry?

As you can see below, at the end of September 2020, DSK had ₩38.1b of debt, up from ₩31.1b a year ago. Click the image for more detail. But on the other hand it also has ₩50.1b in cash, leading to a ₩11.9b net cash position.

How Healthy Is DSK's Balance Sheet?

According to the last reported balance sheet, DSK had liabilities of ₩51.3b due within 12 months, and liabilities of ₩4.94b due beyond 12 months. Offsetting this, it had ₩50.1b in cash and ₩19.6b in receivables that were due within 12 months. So it actually has ₩13.4b more liquid assets than total liabilities.

This short term liquidity is a sign that DSK could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, DSK boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is DSK's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year DSK had a loss before interest and tax, and actually shrunk its revenue by 58%, to ₩39b. To be frank that doesn't bode well.

So How Risky Is DSK?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year DSK had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩5.3b of cash and made a loss of ₩7.5b. Given it only has net cash of ₩11.9b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should be aware of the 1 warning sign we've spotted with DSK .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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