Here's Why Cheongbo Industrial (KOSDAQ:013720) Can Afford Some Debt

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. We note that Cheongbo Industrial. Co., Ltd (KOSDAQ:013720) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cheongbo Industrial

What Is Cheongbo Industrial's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Cheongbo Industrial had ₩19.9b of debt, an increase on ₩13.9b, over one year. On the flip side, it has ₩5.48b in cash leading to net debt of about ₩14.5b.

How Strong Is Cheongbo Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cheongbo Industrial had liabilities of ₩8.66b due within 12 months and liabilities of ₩15.7b due beyond that. Offsetting these obligations, it had cash of ₩5.48b as well as receivables valued at ₩2.86b due within 12 months. So its liabilities total ₩16.0b more than the combination of its cash and short-term receivables.

Cheongbo Industrial has a market capitalization of ₩60.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cheongbo Industrial 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 Cheongbo Industrial had a loss before interest and tax, and actually shrunk its revenue by 27%, to ₩17b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Cheongbo Industrial's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩1.8b 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩2.4b of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Cheongbo Industrial (of which 2 are concerning!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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