Here's Why HYUNGJI INNOVATION & CREATIVELtd (KOSDAQ:011080) Can Afford Some 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.' 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. We note that HYUNGJI INNOVATION & CREATIVE Co.,Ltd (KOSDAQ:011080) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for HYUNGJI INNOVATION & CREATIVELtd

What Is HYUNGJI INNOVATION & CREATIVELtd's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2024 HYUNGJI INNOVATION & CREATIVELtd had debt of ₩21.5b, up from ₩11.1b in one year. However, because it has a cash reserve of ₩4.29b, its net debt is less, at about ₩17.2b.

How Healthy Is HYUNGJI INNOVATION & CREATIVELtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HYUNGJI INNOVATION & CREATIVELtd had liabilities of ₩29.9b due within 12 months and liabilities of ₩6.78b due beyond that. On the other hand, it had cash of ₩4.29b and ₩8.55b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩23.8b.

This is a mountain of leverage relative to its market capitalization of ₩37.8b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HYUNGJI INNOVATION & CREATIVELtd 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 HYUNGJI INNOVATION & CREATIVELtd had a loss before interest and tax, and actually shrunk its revenue by 13%, to ₩57b. That's not what we would hope to see.

Caveat Emptor

Not only did HYUNGJI INNOVATION & CREATIVELtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩5.0b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩6.9b in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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 4 warning signs for HYUNGJI INNOVATION & CREATIVELtd you should be aware of, and 2 of them don't sit too well with us.

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.

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

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.