DB Hitek (KRX:000990) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, DB Hitek Co., Ltd. (KRX:000990) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for DB Hitek

What Is DB Hitek's Debt?

As you can see below, DB Hitek had ₩138.2b of debt at September 2020, down from ₩237.7b a year prior. But on the other hand it also has ₩159.2b in cash, leading to a ₩20.9b net cash position.

How Healthy Is DB Hitek's Balance Sheet?

According to the last reported balance sheet, DB Hitek had liabilities of ₩259.2b due within 12 months, and liabilities of ₩116.6b due beyond 12 months. Offsetting this, it had ₩159.2b in cash and ₩210.0b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to DB Hitek's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩1.51t company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, DB Hitek boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, DB Hitek grew its EBIT by 61% 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 it is future earnings, more than anything, that will determine DB Hitek'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 DB Hitek 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 most recent three years, DB Hitek recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about DB Hitek's liabilities, but we can be reassured by the fact it has has net cash of ₩20.9b. And it impressed us with its EBIT growth of 61% over the last year. So we don't think DB Hitek's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that DB Hitek is showing 1 warning sign in our investment analysis , you should know about...

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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