Is HJ Shipbuilding & Construction (KRX:097230) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies HJ Shipbuilding & Construction Co., Ltd. (KRX:097230) makes use of debt. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for HJ Shipbuilding & Construction

How Much Debt Does HJ Shipbuilding & Construction Carry?

As you can see below, at the end of March 2024, HJ Shipbuilding & Construction had ₩688.4b of debt, up from ₩655.9b a year ago. Click the image for more detail. However, it does have ₩308.9b in cash offsetting this, leading to net debt of about ₩379.5b.

A Look At HJ Shipbuilding & Construction's Liabilities

According to the last reported balance sheet, HJ Shipbuilding & Construction had liabilities of ₩2.07t due within 12 months, and liabilities of ₩432.0b due beyond 12 months. Offsetting this, it had ₩308.9b in cash and ₩204.0b in receivables that were due within 12 months. So it has liabilities totalling ₩1.99t more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the ₩232.3b 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. After all, HJ Shipbuilding & Construction 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 HJ Shipbuilding & Construction 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.

In the last year HJ Shipbuilding & Construction wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to ₩2.2t. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate HJ Shipbuilding & Construction's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable ₩83b at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₩76b in the last year. So we think buying this stock is risky. 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. We've identified 1 warning sign with HJ Shipbuilding & Construction , and understanding them should be part of your investment process.

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.

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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