Health Check: How Prudently Does Hyundai Livart Furniture (KRX:079430) Use Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Hyundai Livart Furniture Company Limited (KRX:079430) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Hyundai Livart Furniture

What Is Hyundai Livart Furniture's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Hyundai Livart Furniture had ₩152.5b of debt, an increase on ₩106.4b, over one year. On the flip side, it has ₩12.6b in cash leading to net debt of about ₩139.8b.

A Look At Hyundai Livart Furniture's Liabilities

We can see from the most recent balance sheet that Hyundai Livart Furniture had liabilities of ₩498.2b falling due within a year, and liabilities of ₩33.0b due beyond that. On the other hand, it had cash of ₩12.6b and ₩338.7b worth of receivables due within a year. So its liabilities total ₩179.8b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩199.1b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hyundai Livart Furniture's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Hyundai Livart Furniture reported revenue of ₩1.7t, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Hyundai Livart Furniture produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩5.4b. 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. Another cause for caution is that is bled ₩46b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Hyundai Livart Furniture .

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. 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.

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