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 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. We can see that HWASHIN CO.,Ltd (KRX:010690) does use debt in its business. But the real question is whether this debt is making the company risky.
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 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.
Check out our latest analysis for HWASHINLtd
What Is HWASHINLtd's Debt?
As you can see below, HWASHINLtd had ₩362.1b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₩77.7b in cash leading to net debt of about ₩284.5b.
A Look At HWASHINLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that HWASHINLtd had liabilities of ₩448.2b due within 12 months and liabilities of ₩118.8b due beyond that. Offsetting this, it had ₩77.7b in cash and ₩178.0b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩311.3b.
This deficit casts a shadow over the ₩159.2b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, HWASHINLtd would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine HWASHINLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year HWASHINLtd had a loss before interest and tax, and actually shrunk its revenue by 6.8%, to ₩1.1t. We would much prefer see growth.
Caveat Emptor
Importantly, HWASHINLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩11b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₩31b over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example HWASHINLtd has 3 warning signs (and 1 which is significant) we think you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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About KOSE:A010690
Undervalued with adequate balance sheet.
