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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that DASAN Networks, Inc. (KOSDAQ:039560) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 DASAN Networks
How Much Debt Does DASAN Networks Carry?
As you can see below, DASAN Networks had ₩64.7b of debt at December 2020, down from ₩90.1b a year prior. But it also has ₩80.4b in cash to offset that, meaning it has ₩15.7b net cash.
A Look At DASAN Networks' Liabilities
According to the last reported balance sheet, DASAN Networks had liabilities of ₩160.9b due within 12 months, and liabilities of ₩60.8b due beyond 12 months. Offsetting these obligations, it had cash of ₩80.4b as well as receivables valued at ₩142.8b due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to DASAN Networks' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩342.7b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, DASAN Networks boasts net cash, so it's fair to say it does not have a heavy debt load! 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 DASAN Networks'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.
In the last year DASAN Networks had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to ₩405b. That's not what we would hope to see.
So How Risky Is DASAN Networks?
While DASAN Networks lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩23b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. Case in point: We've spotted 2 warning signs for DASAN Networks you should be aware of.
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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This article by Simply Wall St is general in nature. 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.
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About KOSDAQ:A039560
Flawless balance sheet low.
