Would Dong A Eltek (KOSDAQ:088130) Be Better Off With Less 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.' 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 note that Dong A Eltek Co., Ltd. (KOSDAQ:088130) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Dong A Eltek

How Much Debt Does Dong A Eltek Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Dong A Eltek had ₩36.5b of debt, an increase on ₩15.2b, over one year. However, it also had ₩35.3b in cash, and so its net debt is ₩1.19b.

How Healthy Is Dong A Eltek's Balance Sheet?

According to the last reported balance sheet, Dong A Eltek had liabilities of ₩93.3b due within 12 months, and liabilities of ₩4.28b due beyond 12 months. Offsetting these obligations, it had cash of ₩35.3b as well as receivables valued at ₩45.2b due within 12 months. So it has liabilities totalling ₩17.1b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Dong A Eltek is worth ₩74.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 Dong A Eltek'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.

Over 12 months, Dong A Eltek made a loss at the EBIT level, and saw its revenue drop to ₩168b, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

While Dong A Eltek's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩1.5b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₩13b and the profit of ₩5.5b. So one might argue that there's still a chance it can get things on the right track. 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. For example, we've discovered 4 warning signs for Dong A Eltek (2 are significant!) that you should be aware of before investing here.

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.