Is HWASHINLtd (KRX:010690) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies HWASHIN CO.,Ltd (KRX:010690) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HWASHINLtd

How Much Debt Does HWASHINLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 HWASHINLtd had ₩405.3b of debt, an increase on ₩389.2b, over one year. However, it does have ₩80.4b in cash offsetting this, leading to net debt of about ₩325.0b.

A Look At HWASHINLtd's Liabilities

According to the last reported balance sheet, HWASHINLtd had liabilities of ₩431.0b due within 12 months, and liabilities of ₩169.2b due beyond 12 months. On the other hand, it had cash of ₩80.4b and ₩187.3b worth of receivables due within a year. So its liabilities total ₩332.6b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₩128.9b 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, HWASHINLtd would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HWASHINLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, HWASHINLtd made a loss at the EBIT level, and saw its revenue drop to ₩1.0t, which is a fall of 9.2%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months HWASHINLtd produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩30b. 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 ₩51b 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with HWASHINLtd (at least 1 which is significant) , 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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