Is DAEDUCK ELECTRONICS (KRX:353200) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that DAEDUCK ELECTRONICS Co., Ltd. (KRX:353200) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. 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.

View our latest analysis for DAEDUCK ELECTRONICS

How Much Debt Does DAEDUCK ELECTRONICS Carry?

The image below, which you can click on for greater detail, shows that DAEDUCK ELECTRONICS had debt of ₩18.2b at the end of March 2024, a reduction from ₩25.4b over a year. However, its balance sheet shows it holds ₩220.6b in cash, so it actually has ₩202.5b net cash.

How Strong Is DAEDUCK ELECTRONICS' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that DAEDUCK ELECTRONICS had liabilities of ₩201.1b due within 12 months and liabilities of ₩72.0b due beyond that. On the other hand, it had cash of ₩220.6b and ₩130.7b worth of receivables due within a year. So it can boast ₩78.3b more liquid assets than total liabilities.

This short term liquidity is a sign that DAEDUCK ELECTRONICS could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that DAEDUCK ELECTRONICS has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact DAEDUCK ELECTRONICS's saving grace is its low debt levels, because its EBIT has tanked 95% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 DAEDUCK ELECTRONICS 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. DAEDUCK ELECTRONICS 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, DAEDUCK ELECTRONICS generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that DAEDUCK ELECTRONICS has net cash of ₩202.5b, as well as more liquid assets than liabilities. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in ₩81b. So we are not troubled with DAEDUCK ELECTRONICS's debt use. 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. We've identified 2 warning signs with DAEDUCK ELECTRONICS , and understanding them should be part of your investment process.

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.

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