Is Daesung Energy (KRX:117580) Using Too Much Debt?

Warren Buffett famously said, '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 Daesung Energy Co., Ltd. (KRX:117580) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Daesung Energy

How Much Debt Does Daesung Energy Carry?

As you can see below, Daesung Energy had ₩106.3b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩53.5b in cash, and so its net debt is ₩52.8b.

How Strong Is Daesung Energy's Balance Sheet?

We can see from the most recent balance sheet that Daesung Energy had liabilities of ₩143.8b falling due within a year, and liabilities of ₩183.5b due beyond that. Offsetting these obligations, it had cash of ₩53.5b as well as receivables valued at ₩65.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩208.2b.

This deficit is considerable relative to its market capitalization of ₩208.9b, so it does suggest shareholders should keep an eye on Daesung Energy's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With net debt sitting at just 1.1 times EBITDA, Daesung Energy is arguably pretty conservatively geared. And it boasts interest cover of 7.1 times, which is more than adequate. It was also good to see that despite losing money on the EBIT line last year, Daesung Energy turned things around in the last 12 months, delivering and EBIT of ₩21b. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Daesung Energy 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, Daesung Energy actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

On our analysis Daesung Energy's conversion of EBIT to free cash flow should signal that it won't have too much trouble with its debt. However, our other observations weren't so heartening. For example, its level of total liabilities makes us a little nervous about its debt. It's also worth noting that Daesung Energy is in the Gas Utilities industry, which is often considered to be quite defensive. Considering this range of data points, we think Daesung Energy is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. Case in point: We've spotted 1 warning sign for Daesung Energy you should be aware of.

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.