Is Iljeong IndustrialLtd (KRX:008500) A Risky Investment?

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.' 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 Iljeong Industrial Co.,Ltd (KRX:008500) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Iljeong IndustrialLtd

How Much Debt Does Iljeong IndustrialLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Iljeong IndustrialLtd had ₩14.7b of debt in December 2020, down from ₩26.2b, one year before. However, it does have ₩1.77b in cash offsetting this, leading to net debt of about ₩12.9b.

How Strong Is Iljeong IndustrialLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Iljeong IndustrialLtd had liabilities of ₩10.7b due within 12 months and liabilities of ₩10.5b due beyond that. Offsetting these obligations, it had cash of ₩1.77b as well as receivables valued at ₩10.8b due within 12 months. So it has liabilities totalling ₩8.72b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Iljeong IndustrialLtd has a market capitalization of ₩17.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Iljeong IndustrialLtd'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 Iljeong IndustrialLtd had a loss before interest and tax, and actually shrunk its revenue by 21%, to ₩31b. To be frank that doesn't bode well.

Caveat Emptor

While Iljeong IndustrialLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩8.9b at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of ₩4.2b into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Iljeong IndustrialLtd (of which 1 can't be ignored!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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