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

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that DB Hitek Co., Ltd. (KRX:000990) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for DB Hitek

How Much Debt Does DB Hitek Carry?

The image below, which you can click on for greater detail, shows that DB Hitek had debt of ₩168.8b at the end of December 2020, a reduction from ₩240.0b over a year. However, it does have ₩218.1b in cash offsetting this, leading to net cash of ₩49.3b.

A Look At DB Hitek's Liabilities

We can see from the most recent balance sheet that DB Hitek had liabilities of ₩261.7b falling due within a year, and liabilities of ₩122.3b due beyond that. On the other hand, it had cash of ₩218.1b and ₩182.4b worth of receivables due within a year. So it can boast ₩16.6b more liquid assets than total liabilities.

This state of affairs indicates that DB Hitek's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩2.44t company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, DB Hitek boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that DB Hitek has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. DB Hitek may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, DB Hitek produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that DB Hitek has net cash of ₩49.3b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 32% over the last year. So is DB Hitek's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - DB Hitek has 1 warning sign we think you should be aware of.

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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