Here's Why Bohae Brewery (KRX:000890) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Bohae Brewery Co., Ltd. (KRX:000890) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Bohae Brewery

What Is Bohae Brewery's Net Debt?

As you can see below, Bohae Brewery had ₩44.7b of debt at September 2020, down from ₩59.2b a year prior. However, because it has a cash reserve of ₩8.48b, its net debt is less, at about ₩36.3b.

How Strong Is Bohae Brewery's Balance Sheet?

We can see from the most recent balance sheet that Bohae Brewery had liabilities of ₩46.4b falling due within a year, and liabilities of ₩27.5b due beyond that. Offsetting these obligations, it had cash of ₩8.48b as well as receivables valued at ₩20.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩45.1b.

Bohae Brewery has a market capitalization of ₩122.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Bohae Brewery 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.

In the last year Bohae Brewery's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Bohae Brewery had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩11b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 ₩15b. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Bohae Brewery that you should be aware of before investing here.

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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