Is Pyung Hwa Holdings (KRX:010770) Using Too Much 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.' 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 Pyung Hwa Holdings Co., Ltd. (KRX:010770) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Pyung Hwa Holdings

What Is Pyung Hwa Holdings's Debt?

As you can see below, Pyung Hwa Holdings had ₩260.9b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has ₩43.8b in cash leading to net debt of about ₩217.1b.

A Look At Pyung Hwa Holdings's Liabilities

According to the last reported balance sheet, Pyung Hwa Holdings had liabilities of ₩379.3b due within 12 months, and liabilities of ₩45.8b due beyond 12 months. Offsetting these obligations, it had cash of ₩43.8b as well as receivables valued at ₩104.7b due within 12 months. So it has liabilities totalling ₩276.6b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩45.3b 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, Pyung Hwa Holdings 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 Pyung Hwa Holdings 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, Pyung Hwa Holdings made a loss at the EBIT level, and saw its revenue drop to ₩511b, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

While Pyung Hwa Holdings'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 ₩938m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₩2.8b in the last year. So we think buying this stock is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Pyung Hwa Holdings is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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