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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that HJ Magnolia Yongpyong Hotel & Resort (KRX:070960) does use debt in its business. 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 HJ Magnolia Yongpyong Hotel & Resort

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

The chart below, which you can click on for greater detail, shows that HJ Magnolia Yongpyong Hotel & Resort had ₩187.5b in debt in March 2024; about the same as the year before. However, because it has a cash reserve of ₩126.2b, its net debt is less, at about ₩61.3b.

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

We can see from the most recent balance sheet that HJ Magnolia Yongpyong Hotel & Resort had liabilities of ₩390.3b falling due within a year, and liabilities of ₩226.4b due beyond that. On the other hand, it had cash of ₩126.2b and ₩36.2b worth of receivables due within a year. So its liabilities total ₩454.3b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₩157.6b 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 definitely think shareholders need to watch this one closely. After all, HJ Magnolia Yongpyong Hotel & Resort would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Looking at its net debt to EBITDA of 1.5 and interest cover of 2.8 times, it seems to us that HJ Magnolia Yongpyong Hotel & Resort is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Pleasingly, HJ Magnolia Yongpyong Hotel & Resort is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 223% gain in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, HJ Magnolia Yongpyong Hotel & Resort actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

We feel some trepidation about HJ Magnolia Yongpyong Hotel & Resort's difficulty level of total liabilities, but we've got positives to focus on, too. To wit both its conversion of EBIT to free cash flow and EBIT growth rate were encouraging signs. We think that HJ Magnolia Yongpyong Hotel & Resort's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. Over time, share prices tend to follow earnings per share, so if you're interested in HJ Magnolia Yongpyong Hotel & Resort, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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.