Is Taeyang Metal Industrial (KRX:004100) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Taeyang Metal Industrial Co., Ltd. (KRX:004100) 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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Taeyang Metal Industrial

What Is Taeyang Metal Industrial's Net Debt?

The chart below, which you can click on for greater detail, shows that Taeyang Metal Industrial had ₩184.8b in debt in September 2020; about the same as the year before. However, because it has a cash reserve of ₩16.7b, its net debt is less, at about ₩168.0b.

How Strong Is Taeyang Metal Industrial's Balance Sheet?

The latest balance sheet data shows that Taeyang Metal Industrial had liabilities of ₩246.4b due within a year, and liabilities of ₩63.4b falling due after that. Offsetting this, it had ₩16.7b in cash and ₩74.0b in receivables that were due within 12 months. So it has liabilities totalling ₩219.1b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩61.2b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Taeyang Metal Industrial would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Taeyang Metal 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.

Over 12 months, Taeyang Metal Industrial made a loss at the EBIT level, and saw its revenue drop to ₩397b, which is a fall of 16%. We would much prefer see growth.

Caveat Emptor

Not only did Taeyang Metal Industrial's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩12b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through ₩986m in the last year. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. For example, we've discovered 3 warning signs for Taeyang Metal Industrial (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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