Hyungji Global (KOSDAQ:308100) Has Debt But No Earnings; Should You Worry?

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.' 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 can see that Hyungji Global Co., Ltd. (KOSDAQ:308100) does use debt in its business. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Hyungji Global Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Hyungji Global had ₩17.8b of debt, an increase on ₩17.0b, over one year. On the flip side, it has ₩3.08b in cash leading to net debt of about ₩14.7b.

A Look At Hyungji Global's Liabilities

Zooming in on the latest balance sheet data, we can see that Hyungji Global had liabilities of ₩42.8b due within 12 months and liabilities of ₩11.1b due beyond that. Offsetting these obligations, it had cash of ₩3.08b as well as receivables valued at ₩21.6b due within 12 months. So its liabilities total ₩29.2b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩18.1b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Hyungji Global 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 it is Hyungji Global'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.

View our latest analysis for Hyungji Global

In the last year Hyungji Global wasn't profitable at an EBIT level, but managed to grow its revenue by 11%, to ₩47b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Hyungji Global had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩5.5b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩771m in negative free cash flow over the last year. That means it's on the risky side of things. 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. Case in point: We've spotted 2 warning signs for Hyungji Global you should be aware of, and 1 of them is a bit unpleasant.

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.