Is Inhwa Precision (KOSDAQ:101930) Using Too Much Debt?

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, Inhwa Precision Co., Ltd (KOSDAQ:101930) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Inhwa Precision

How Much Debt Does Inhwa Precision Carry?

The image below, which you can click on for greater detail, shows that Inhwa Precision had debt of ₩118.2b at the end of March 2024, a reduction from ₩142.3b over a year. However, it also had ₩59.0b in cash, and so its net debt is ₩59.2b.

A Look At Inhwa Precision's Liabilities

Zooming in on the latest balance sheet data, we can see that Inhwa Precision had liabilities of ₩133.2b due within 12 months and liabilities of ₩11.1b due beyond that. Offsetting this, it had ₩59.0b in cash and ₩18.0b in receivables that were due within 12 months. So its liabilities total ₩67.3b more than the combination of its cash and short-term receivables.

Inhwa Precision has a market capitalization of ₩127.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Inhwa Precision'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 Inhwa Precision wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to ₩104b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Inhwa Precision produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩2.9b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₩20b and the profit of ₩50b. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Be aware that Inhwa Precision is showing 3 warning signs in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com