Does Chonbang (KRX:000950) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Chonbang Co., Ltd. (KRX:000950) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Chonbang

How Much Debt Does Chonbang Carry?

As you can see below, Chonbang had ₩180.0b of debt at September 2020, down from ₩192.6b a year prior. However, it does have ₩14.3b in cash offsetting this, leading to net debt of about ₩165.7b.

How Healthy Is Chonbang's Balance Sheet?

According to the last reported balance sheet, Chonbang had liabilities of ₩223.3b due within 12 months, and liabilities of ₩37.7b due beyond 12 months. Offsetting these obligations, it had cash of ₩14.3b as well as receivables valued at ₩14.6b due within 12 months. So its liabilities total ₩232.2b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩35.0b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Chonbang would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Chonbang's earnings that will influence how the balance sheet holds up in the future. 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 Chonbang had a loss before interest and tax, and actually shrunk its revenue by 26%, to ₩107b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Chonbang's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩25b at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost ₩28b in the last year. So we think buying this stock is risky. 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 2 warning signs for Chonbang you should be aware of, and 1 of them 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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