Health Check: How Prudently Does Hanil Forging Industrial (KOSDAQ:024740) Use Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Hanil Forging Industrial Co., Ltd. (KOSDAQ:024740) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Hanil Forging Industrial

What Is Hanil Forging Industrial's Net Debt?

The chart below, which you can click on for greater detail, shows that Hanil Forging Industrial had ₩96.9b in debt in September 2020; about the same as the year before. However, it also had ₩18.6b in cash, and so its net debt is ₩78.3b.

How Healthy Is Hanil Forging Industrial's Balance Sheet?

The latest balance sheet data shows that Hanil Forging Industrial had liabilities of ₩106.1b due within a year, and liabilities of ₩16.7b falling due after that. Offsetting this, it had ₩18.6b in cash and ₩22.6b in receivables that were due within 12 months. So its liabilities total ₩81.7b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩57.6b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is Hanil Forging Industrial's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hanil Forging Industrial made a loss at the EBIT level, and saw its revenue drop to ₩124b, which is a fall of 17%. We would much prefer see growth.

Caveat Emptor

While Hanil Forging Industrial's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩4.1b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₩6.5b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. We've identified 2 warning signs with Hanil Forging Industrial (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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