Is HansaemkLtd (KRX:069640) Weighed On By Its Debt Load?

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. We note that Hansaemk Co.,Ltd. (KRX:069640) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for HansaemkLtd

What Is HansaemkLtd's Net Debt?

As you can see below, at the end of December 2020, HansaemkLtd had ₩31.9b of debt, up from ₩29.5b a year ago. Click the image for more detail. However, it does have ₩2.80b in cash offsetting this, leading to net debt of about ₩29.1b.

How Healthy Is HansaemkLtd's Balance Sheet?

We can see from the most recent balance sheet that HansaemkLtd had liabilities of ₩63.1b falling due within a year, and liabilities of ₩8.77b due beyond that. Offsetting these obligations, it had cash of ₩2.80b as well as receivables valued at ₩33.5b due within 12 months. So its liabilities total ₩35.6b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩43.1b, so it does suggest shareholders should keep an eye on HansaemkLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is HansaemkLtd'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.

Over 12 months, HansaemkLtd made a loss at the EBIT level, and saw its revenue drop to ₩220b, which is a fall of 28%. That makes us nervous, to say the least.

Caveat Emptor

While HansaemkLtd'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 ₩19b 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. For example, we would not want to see a repeat of last year's loss of ₩23b. So to be blunt we do think it is risky. 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. We've identified 2 warning signs with HansaemkLtd (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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