Here's Why Dong A Eltek (KOSDAQ:088130) Has A Meaningful Debt Burden

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 note that Dong A Eltek Co., Ltd. (KOSDAQ:088130) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Dong A Eltek

What Is Dong A Eltek's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Dong A Eltek had ₩43.8b of debt, an increase on ₩36.5b, over one year. However, it does have ₩65.2b in cash offsetting this, leading to net cash of ₩21.4b.

A Look At Dong A Eltek's Liabilities

Zooming in on the latest balance sheet data, we can see that Dong A Eltek had liabilities of ₩109.8b due within 12 months and liabilities of ₩5.35b due beyond that. Offsetting these obligations, it had cash of ₩65.2b as well as receivables valued at ₩31.7b due within 12 months. So its liabilities total ₩18.2b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Dong A Eltek is worth ₩72.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Dong A Eltek also has more cash than debt, so we're pretty confident it can manage its debt safely.

We saw Dong A Eltek grow its EBIT by 6.7% in the last twelve months. That's far from incredible but it is a good thing, when it comes to paying off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dong A Eltek 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dong A Eltek 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, Dong A Eltek burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While Dong A Eltek does have more liabilities than liquid assets, it also has net cash of ₩21.4b. On top of that, it increased its EBIT by 6.7% in the last twelve months. So while Dong A Eltek does not have a great balance sheet, it's certainly not too bad. 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 Dong A Eltek has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com