DAEDUCK ELECTRONICS (KRX:353200) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, DAEDUCK ELECTRONICS Co., Ltd. (KRX:353200) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is DAEDUCK ELECTRONICS's Net Debt?

As you can see below, at the end of March 2025, DAEDUCK ELECTRONICS had ₩44.1b of debt, up from ₩18.2b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩251.9b in cash, so it actually has ₩207.8b net cash.

How Strong Is DAEDUCK ELECTRONICS' Balance Sheet?

The latest balance sheet data shows that DAEDUCK ELECTRONICS had liabilities of ₩214.1b due within a year, and liabilities of ₩43.0b falling due after that. Offsetting these obligations, it had cash of ₩251.9b as well as receivables valued at ₩146.4b due within 12 months. So it can boast ₩141.2b more liquid assets than total liabilities.

This surplus suggests that DAEDUCK ELECTRONICS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, DAEDUCK ELECTRONICS boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for DAEDUCK ELECTRONICS

The modesty of its debt load may become crucial for DAEDUCK ELECTRONICS if management cannot prevent a repeat of the 25% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine DAEDUCK ELECTRONICS'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While DAEDUCK ELECTRONICS has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, DAEDUCK ELECTRONICS generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that DAEDUCK ELECTRONICS has net cash of ₩207.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩19b, being 82% of its EBIT. So we are not troubled with DAEDUCK ELECTRONICS's debt use. 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 1 warning sign for DAEDUCK ELECTRONICS that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.