Does HNK Machine Tool (KOSDAQ:101680) Have A Healthy Balance Sheet?

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 HNK Machine Tool Co., Ltd. (KOSDAQ:101680) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 HNK Machine Tool

What Is HNK Machine Tool's Debt?

As you can see below, at the end of September 2024, HNK Machine Tool had ₩16.7b of debt, up from ₩8.20b a year ago. Click the image for more detail. However, it does have ₩13.5b in cash offsetting this, leading to net debt of about ₩3.18b.

A Look At HNK Machine Tool's Liabilities

We can see from the most recent balance sheet that HNK Machine Tool had liabilities of ₩34.4b falling due within a year, and liabilities of ₩1.73b due beyond that. Offsetting these obligations, it had cash of ₩13.5b as well as receivables valued at ₩4.70b due within 12 months. So it has liabilities totalling ₩17.9b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩24.1b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HNK Machine Tool will need earnings to service that debt. 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, HNK Machine Tool reported revenue of ₩64b, which is a gain of 48%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate HNK Machine Tool's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₩1.7b 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩872m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for HNK Machine Tool (1 makes us a bit uncomfortable) you should be aware of.

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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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.