Is DukSan NeoluxLtd (KOSDAQ:213420) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, DukSan Neolux Co.,Ltd (KOSDAQ:213420) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for DukSan NeoluxLtd

What Is DukSan NeoluxLtd's Debt?

As you can see below, DukSan NeoluxLtd had ₩18.9b of debt at March 2024, down from ₩21.2b a year prior. However, it does have ₩42.9b in cash offsetting this, leading to net cash of ₩24.0b.

How Strong Is DukSan NeoluxLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DukSan NeoluxLtd had liabilities of ₩25.8b due within 12 months and liabilities of ₩27.4b due beyond that. Offsetting these obligations, it had cash of ₩42.9b as well as receivables valued at ₩13.1b due within 12 months. So it actually has ₩2.81b more liquid assets than total liabilities.

This state of affairs indicates that DukSan NeoluxLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩1.05t company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, DukSan NeoluxLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, DukSan NeoluxLtd grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DukSan NeoluxLtd 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While DukSan NeoluxLtd 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. During the last three years, DukSan NeoluxLtd generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case DukSan NeoluxLtd has ₩24.0b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩30b, being 86% of its EBIT. So we don't think DukSan NeoluxLtd's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of DukSan NeoluxLtd's earnings per share history for free.

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. 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.