Here's Why DASAN Networks (KOSDAQ:039560) Can Afford Some Debt

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. We can see that DASAN Networks, Inc. (KOSDAQ:039560) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for DASAN Networks

How Much Debt Does DASAN Networks Carry?

You can click the graphic below for the historical numbers, but it shows that DASAN Networks had ₩65.7b of debt in September 2020, down from ₩112.2b, one year before. However, because it has a cash reserve of ₩60.9b, its net debt is less, at about ₩4.87b.

How Strong Is DASAN Networks's Balance Sheet?

We can see from the most recent balance sheet that DASAN Networks had liabilities of ₩152.2b falling due within a year, and liabilities of ₩62.8b due beyond that. On the other hand, it had cash of ₩60.9b and ₩167.5b worth of receivables due within a year. So it can boast ₩13.3b more liquid assets than total liabilities.

This short term liquidity is a sign that DASAN Networks could probably pay off its debt with ease, as its balance sheet is far from stretched. Carrying virtually no net debt, DASAN Networks has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if DASAN Networks 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.

In the last year DASAN Networks had a loss before interest and tax, and actually shrunk its revenue by 9.0%, to ₩399b. That's not what we would hope to see.

Caveat Emptor

Importantly, DASAN Networks had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩7.3b. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for DASAN Networks you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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