Is Hizeaero (KOSDAQ:221840) Using Too Much Debt?

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.' 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 note that Hizeaero Co., Ltd. (KOSDAQ:221840) does have debt on its balance sheet. 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hizeaero

What Is Hizeaero's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Hizeaero had ₩52.7b of debt, an increase on ₩47.4b, over one year. However, it does have ₩36.5b in cash offsetting this, leading to net debt of about ₩16.1b.

A Look At Hizeaero's Liabilities

According to the last reported balance sheet, Hizeaero had liabilities of ₩32.5b due within 12 months, and liabilities of ₩33.8b due beyond 12 months. Offsetting this, it had ₩36.5b in cash and ₩7.67b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩22.0b.

While this might seem like a lot, it is not so bad since Hizeaero has a market capitalization of ₩84.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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 you can't view debt in total isolation; since Hizeaero 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, Hizeaero made a loss at the EBIT level, and saw its revenue drop to ₩52b, which is a fall of 25%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Hizeaero's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩1.2b. 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 ₩1.6b in negative free cash flow over the last twelve months. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Hizeaero you should be aware of, and 1 of them is a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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