Is HLB (KOSDAQ:028300) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that HLB Co., Ltd. (KOSDAQ:028300) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for HLB

What Is HLB's Net Debt?

The image below, which you can click on for greater detail, shows that HLB had debt of ₩44.6b at the end of December 2020, a reduction from ₩86.6b over a year. However, it does have ₩225.0b in cash offsetting this, leading to net cash of ₩180.4b.

How Healthy Is HLB's Balance Sheet?

The latest balance sheet data shows that HLB had liabilities of ₩98.0b due within a year, and liabilities of ₩51.0b falling due after that. Offsetting these obligations, it had cash of ₩225.0b as well as receivables valued at ₩14.5b due within 12 months. So it actually has ₩90.4b more liquid assets than total liabilities.

This surplus suggests that HLB has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that HLB has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HLB 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.

Over 12 months, HLB reported revenue of ₩56b, which is a gain of 46%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is HLB?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year HLB had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of ₩131b and booked a ₩80b accounting loss. With only ₩180.4b on the balance sheet, it would appear that its going to need to raise capital again soon. HLB's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that HLB is showing 3 warning signs in our investment analysis , and 1 of those is significant...

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.

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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.
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