Is Dongil Technology (KOSDAQ:032960) Using Debt Sensibly?

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.' 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. As with many other companies Dongil Technology, Ltd (KOSDAQ:032960) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dongil Technology

What Is Dongil Technology's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Dongil Technology had debt of ₩1.90b, up from ₩745.0m in one year. However, it does have ₩30.1b in cash offsetting this, leading to net cash of ₩28.2b.

How Healthy Is Dongil Technology's Balance Sheet?

The latest balance sheet data shows that Dongil Technology had liabilities of ₩5.21b due within a year, and liabilities of ₩1.98b falling due after that. Offsetting these obligations, it had cash of ₩30.1b as well as receivables valued at ₩3.29b due within 12 months. So it can boast ₩26.2b more liquid assets than total liabilities.

This surplus liquidity suggests that Dongil Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Dongil Technology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Dongil Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Dongil Technology made a loss at the EBIT level, and saw its revenue drop to ₩25b, which is a fall of 14%. We would much prefer see growth.

So How Risky Is Dongil Technology?

Although Dongil Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of ₩1.4b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. The next few years will be important as the business matures. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Dongil Technology (including 1 which is concerning) .

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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