HYUNGJI Innovation and Creative (KOSDAQ:011080) Is Carrying A Fair Bit Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that HYUNGJI Innovation and Creative Company Limited (KOSDAQ:011080) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HYUNGJI Innovation and Creative

What Is HYUNGJI Innovation and Creative's Debt?

As you can see below, at the end of September 2020, HYUNGJI Innovation and Creative had ₩19.9b of debt, up from ₩18.2b a year ago. Click the image for more detail. However, it also had ₩3.42b in cash, and so its net debt is ₩16.5b.

How Healthy Is HYUNGJI Innovation and Creative's Balance Sheet?

The latest balance sheet data shows that HYUNGJI Innovation and Creative had liabilities of ₩29.1b due within a year, and liabilities of ₩6.58b falling due after that. Offsetting these obligations, it had cash of ₩3.42b as well as receivables valued at ₩6.51b due within 12 months. So it has liabilities totalling ₩25.7b more than its cash and near-term receivables, combined.

This deficit isn't so bad because HYUNGJI Innovation and Creative is worth ₩51.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is HYUNGJI Innovation and Creative'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.

Over 12 months, HYUNGJI Innovation and Creative made a loss at the EBIT level, and saw its revenue drop to ₩75b, which is a fall of 27%. To be frank that doesn't bode well.

Caveat Emptor

While HYUNGJI Innovation and Creative's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩2.4b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₩2.3b into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with HYUNGJI Innovation and Creative (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

When trading HYUNGJI Innovation and Creative or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on 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.