Is Inhwa Precision (KOSDAQ:101930) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Inhwa Precision Co., Ltd (KOSDAQ:101930) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Inhwa Precision

What Is Inhwa Precision's Debt?

The chart below, which you can click on for greater detail, shows that Inhwa Precision had ₩134.7b in debt in September 2020; about the same as the year before. However, it also had ₩34.7b in cash, and so its net debt is ₩100.0b.

How Strong Is Inhwa Precision's Balance Sheet?

According to the last reported balance sheet, Inhwa Precision had liabilities of ₩146.5b due within 12 months, and liabilities of ₩3.97b due beyond 12 months. On the other hand, it had cash of ₩34.7b and ₩27.3b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩88.5b.

The deficiency here weighs heavily on the ₩57.7b 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 definitely think shareholders need to watch this one closely. At the end of the day, Inhwa Precision would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Inhwa Precision'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, Inhwa Precision made a loss at the EBIT level, and saw its revenue drop to ₩114b, which is a fall of 6.6%. We would much prefer see growth.

Caveat Emptor

Importantly, Inhwa Precision had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩2.4b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. But on the bright side the company actually produced a statutory profit of ₩1.2b and free cash flow of ₩13b. So one might argue that there's still a chance it can get things on the right track. 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 example, we've discovered 5 warning signs for Inhwa Precision (2 are potentially serious!) that you should be aware of before investing here.

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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