Welcron HantecLtd (KOSDAQ:076080) Has Debt But No Earnings; Should You Worry?

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 Welcron Hantec Co.,Ltd. (KOSDAQ:076080) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Welcron HantecLtd

How Much Debt Does Welcron HantecLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Welcron HantecLtd had ₩14.5b of debt, an increase on none, over one year. On the flip side, it has ₩3.43b in cash leading to net debt of about ₩11.1b.

How Strong Is Welcron HantecLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Welcron HantecLtd had liabilities of ₩83.2b due within 12 months and liabilities of ₩2.02b due beyond that. Offsetting these obligations, it had cash of ₩3.43b as well as receivables valued at ₩55.5b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩26.3b.

This deficit is considerable relative to its market capitalization of ₩27.1b, so it does suggest shareholders should keep an eye on Welcron HantecLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Welcron HantecLtd 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, Welcron HantecLtd made a loss at the EBIT level, and saw its revenue drop to ₩260b, which is a fall of 26%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Welcron HantecLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩17b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩12b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Welcron HantecLtd (of which 2 don't sit too well with us!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.