Does HJ Magnolia Yongpyong Hotel & Resort (KRX:070960) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, HJ Magnolia Yongpyong Hotel & Resort (KRX:070960) does carry debt. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for HJ Magnolia Yongpyong Hotel & Resort

What Is HJ Magnolia Yongpyong Hotel & Resort's Debt?

As you can see below, at the end of September 2020, HJ Magnolia Yongpyong Hotel & Resort had ₩163.0b of debt, up from ₩155.5b a year ago. Click the image for more detail. However, because it has a cash reserve of ₩96.5b, its net debt is less, at about ₩66.5b.

How Healthy Is HJ Magnolia Yongpyong Hotel & Resort's Balance Sheet?

According to the last reported balance sheet, HJ Magnolia Yongpyong Hotel & Resort had liabilities of ₩307.8b due within 12 months, and liabilities of ₩224.8b due beyond 12 months. On the other hand, it had cash of ₩96.5b and ₩40.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩395.9b.

The deficiency here weighs heavily on the ₩233.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, HJ Magnolia Yongpyong Hotel & Resort would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is HJ Magnolia Yongpyong Hotel & Resort'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, HJ Magnolia Yongpyong Hotel & Resort reported revenue of ₩134b, which is a gain of 8.2%, 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

Importantly, HJ Magnolia Yongpyong Hotel & Resort had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩3.4b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₩13b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. For instance, we've identified 3 warning signs for HJ Magnolia Yongpyong Hotel & Resort (1 is concerning) you should be aware of.

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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