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 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 Muhak Co., Ltd. (KRX:033920) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Muhak
What Is Muhak's Debt?
As you can see below, at the end of September 2020, Muhak had ₩52.0b of debt, up from ₩42.0b a year ago. Click the image for more detail. However, it does have ₩62.0b in cash offsetting this, leading to net cash of ₩10.0b.
How Strong Is Muhak's Balance Sheet?
We can see from the most recent balance sheet that Muhak had liabilities of ₩122.1b falling due within a year, and liabilities of ₩14.1b due beyond that. Offsetting this, it had ₩62.0b in cash and ₩25.2b in receivables that were due within 12 months. So its liabilities total ₩49.0b more than the combination of its cash and short-term receivables.
Muhak has a market capitalization of ₩186.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Muhak boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Muhak 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, Muhak made a loss at the EBIT level, and saw its revenue drop to ₩148b, which is a fall of 16%. That's not what we would hope to see.
So How Risky Is Muhak?
While Muhak lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow ₩5.2b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Muhak .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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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About KOSE:A033920
Adequate balance sheet second-rate dividend payer.
