Is HJ Magnolia Yongpyong Hotel & Resort (KRX:070960) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, HJ Magnolia Yongpyong Hotel & Resort (KRX:070960) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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. The first step when considering a company's debt levels is to consider its 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, HJ Magnolia Yongpyong Hotel & Resort had ₩154.3b of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had ₩80.4b in cash, and so its net debt is ₩73.9b.

A Look At HJ Magnolia Yongpyong Hotel & Resort's Liabilities

Zooming in on the latest balance sheet data, we can see that HJ Magnolia Yongpyong Hotel & Resort had liabilities of ₩293.8b due within 12 months and liabilities of ₩199.0b due beyond that. Offsetting these obligations, it had cash of ₩80.4b as well as receivables valued at ₩24.0b due within 12 months. So it has liabilities totalling ₩388.4b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩205.0b company, like a colossus towering over mere mortals. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HJ Magnolia Yongpyong Hotel & Resort will need earnings to service that debt. 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 ₩133b, which is a gain of 4.2%, 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 ₩3.8b 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 ₩14b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. Case in point: We've spotted 3 warning signs for HJ Magnolia Yongpyong Hotel & Resort you should be aware of, and 1 of them is a bit unpleasant.

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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