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Pyung Hwa Holdings (KRX:010770) Has Debt But No Earnings; Should You Worry?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Pyung Hwa Holdings Co., Ltd. (KRX:010770) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View 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. However, because it has a cash reserve of ₩43.8b, its net debt is less, at about ₩217.1b.
How Strong Is Pyung Hwa Holdings' Balance Sheet?
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 its liabilities outweigh the sum of its cash and (near-term) receivables by ₩276.6b.
This deficit casts a shadow over the ₩51.6b company, like a colossus towering over mere mortals. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Pyung Hwa Holdings's earnings that will influence how the balance sheet holds up in the future. 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, Pyung Hwa Holdings made a loss at the EBIT level, and saw its revenue drop to ₩511b, which is a fall of 12%. We would much prefer see growth.
Caveat Emptor
Not only did Pyung Hwa Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩938m. 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 since it is low on liquid assets, and made a loss of ₩2.8b in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. For example, we've discovered 3 warning signs for Pyung Hwa Holdings (1 is significant!) that you should be aware of before investing here.
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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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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About KOSE:A010770
Established dividend payer and good value.