These 4 Measures Indicate That Daejoo Electronic Materials (KOSDAQ:078600) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Daejoo Electronic Materials Co., Ltd. (KOSDAQ:078600) does use debt in its business. But the real question is whether this debt is making the company risky.

We've discovered 2 warning signs about Daejoo Electronic Materials. View them for free.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Daejoo Electronic Materials's Debt?

As you can see below, at the end of December 2024, Daejoo Electronic Materials had ₩336.1b of debt, up from ₩229.3b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩92.6b, its net debt is less, at about ₩243.5b.

How Strong Is Daejoo Electronic Materials' Balance Sheet?

The latest balance sheet data shows that Daejoo Electronic Materials had liabilities of ₩315.4b due within a year, and liabilities of ₩77.3b falling due after that. Offsetting this, it had ₩92.6b in cash and ₩52.5b in receivables that were due within 12 months. So its liabilities total ₩247.6b more than the combination of its cash and short-term receivables.

Given Daejoo Electronic Materials has a market capitalization of ₩1.30t, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

Check out our latest analysis for Daejoo Electronic Materials

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Daejoo Electronic Materials's debt to EBITDA ratio of 5.9 suggests a heavy debt load, its interest coverage of 7.6 implies it services that debt with ease. Our best guess is that the company does indeed have significant debt obligations. Notably, Daejoo Electronic Materials's EBIT launched higher than Elon Musk, gaining a whopping 373% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Daejoo Electronic Materials'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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Daejoo Electronic Materials saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Neither Daejoo Electronic Materials's ability to convert EBIT to free cash flow nor its net debt to EBITDA gave us confidence in its ability to take on more debt. But its EBIT growth rate tells a very different story, and suggests some resilience. We think that Daejoo Electronic Materials's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Daejoo Electronic Materials 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.