Health Check: How Prudently Does STX Heavy Industries (KRX:071970) Use Debt?

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. Importantly, STX Heavy Industries Co., Ltd. (KRX:071970) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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 STX Heavy Industries

What Is STX Heavy Industries's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 STX Heavy Industries had debt of ₩173.1b, up from ₩125.0b in one year. However, it also had ₩53.1b in cash, and so its net debt is ₩120.0b.

How Healthy Is STX Heavy Industries' Balance Sheet?

We can see from the most recent balance sheet that STX Heavy Industries had liabilities of ₩182.9b falling due within a year, and liabilities of ₩120.0b due beyond that. Offsetting this, it had ₩53.1b in cash and ₩30.1b in receivables that were due within 12 months. So its liabilities total ₩219.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩102.5b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, STX Heavy Industries would likely require a major re-capitalisation if it had to pay its creditors today. 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 STX Heavy Industries 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.

In the last year STX Heavy Industries wasn't profitable at an EBIT level, but managed to grow its revenue by 7.4%, to ₩258b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, STX Heavy Industries had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩5.5b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₩4.4b over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - STX Heavy Industries has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you’re looking to trade STX Heavy Industries, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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