Here's Why DL E&CLtd (KRX:375500) Has A Meaningful Debt Burden

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies DL E&C Co.,Ltd. (KRX:375500) makes use of debt. But should shareholders be worried about its use of debt?

Our free stock report includes 1 warning sign investors should be aware of before investing in DL E&CLtd. Read for free now.

What Risk Does Debt Bring?

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. 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, 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.

What Is DL E&CLtd's Debt?

As you can see below, DL E&CLtd had ₩1.08t of debt at December 2024, down from ₩1.15t a year prior. But on the other hand it also has ₩2.07t in cash, leading to a ₩995.1b net cash position.

How Healthy Is DL E&CLtd's Balance Sheet?

According to the last reported balance sheet, DL E&CLtd had liabilities of ₩3.85t due within 12 months, and liabilities of ₩1.01t due beyond 12 months. Offsetting these obligations, it had cash of ₩2.07t as well as receivables valued at ₩1.69t due within 12 months. So it has liabilities totalling ₩1.10t more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of ₩1.61t, so it does suggest shareholders should keep an eye on DL E&CLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, DL E&CLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for DL E&CLtd

In fact DL E&CLtd's saving grace is its low debt levels, because its EBIT has tanked 36% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine DL E&CLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. DL E&CLtd 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. Over the most recent three years, DL E&CLtd recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While DL E&CLtd does have more liabilities than liquid assets, it also has net cash of ₩995.1b. So although we see some areas for improvement, we're not too worried about DL E&CLtd's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for DL E&CLtd 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.