Is HYUNGJI INNOVATION & CREATIVELtd (KOSDAQ:011080) A Risky Investment?

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.' 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, HYUNGJI INNOVATION & CREATIVE Co.,Ltd (KOSDAQ:011080) 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for HYUNGJI INNOVATION & CREATIVELtd

What Is HYUNGJI INNOVATION & CREATIVELtd's Debt?

As you can see below, HYUNGJI INNOVATION & CREATIVELtd had ₩17.5b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩3.64b in cash, and so its net debt is ₩13.9b.

A Look At HYUNGJI INNOVATION & CREATIVELtd's Liabilities

According to the last reported balance sheet, HYUNGJI INNOVATION & CREATIVELtd had liabilities of ₩27.5b due within 12 months, and liabilities of ₩6.32b due beyond 12 months. Offsetting this, it had ₩3.64b in cash and ₩6.67b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩23.6b.

While this might seem like a lot, it is not so bad since HYUNGJI INNOVATION & CREATIVELtd has a market capitalization of ₩67.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is HYUNGJI INNOVATION & CREATIVELtd'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.

In the last year HYUNGJI INNOVATION & CREATIVELtd had a loss before interest and tax, and actually shrunk its revenue by 34%, to ₩67b. That makes us nervous, to say the least.

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). To be specific the EBIT loss came in at ₩5.4b. 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩1.5b in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for HYUNGJI INNOVATION & CREATIVELtd (1 doesn't sit too well with us!) that you should be aware of before investing here.

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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