Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Dongyang Express Corp. (KRX:084670) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Dongyang Express
How Much Debt Does Dongyang Express Carry?
As you can see below, Dongyang Express had ₩30.6b of debt at September 2020, down from ₩46.5b a year prior. On the flip side, it has ₩6.09b in cash leading to net debt of about ₩24.5b.
How Strong Is Dongyang Express's Balance Sheet?
The latest balance sheet data shows that Dongyang Express had liabilities of ₩39.4b due within a year, and liabilities of ₩18.9b falling due after that. On the other hand, it had cash of ₩6.09b and ₩3.56b worth of receivables due within a year. So it has liabilities totalling ₩48.7b more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of ₩71.9b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Dongyang Express will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Dongyang Express had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₩99b. To be frank that doesn't bode well.
Caveat Emptor
While Dongyang Express'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 a very considerable ₩15b 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩26b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Dongyang Express is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...
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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About KOSE:A084670
Dongyang Express
Provides express bus transportation services in South Korea.
Low and slightly overvalued.
