Pyung Hwa Industrial (KRX:090080) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Pyung Hwa Industrial Co., Ltd. (KRX:090080) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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.

Check out our latest analysis for Pyung Hwa Industrial

What Is Pyung Hwa Industrial's Debt?

As you can see below, Pyung Hwa Industrial had ₩84.0b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩17.9b in cash, and so its net debt is ₩66.1b.

How Strong Is Pyung Hwa Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pyung Hwa Industrial had liabilities of ₩147.5b due within 12 months and liabilities of ₩30.1b due beyond that. On the other hand, it had cash of ₩17.9b and ₩60.3b worth of receivables due within a year. So its liabilities total ₩99.4b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩66.7b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Pyung Hwa Industrial's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Pyung Hwa Industrial had a loss before interest and tax, and actually shrunk its revenue by 4.2%, to ₩339b. We would much prefer see growth.

Caveat Emptor

Importantly, Pyung Hwa Industrial had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩8.3b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. It's fair to say the loss of ₩7.8b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. For example, we've discovered 2 warning signs for Pyung Hwa Industrial (1 is significant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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