Stock Analysis

These 4 Measures Indicate That Haitai Confectionery&Foodsltd (KRX:101530) Is Using Debt Extensively

KOSE:A101530
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Haitai Confectionery&Foods Co.,ltd. (KRX:101530) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Haitai Confectionery&Foodsltd

What Is Haitai Confectionery&Foodsltd's Net Debt?

The chart below, which you can click on for greater detail, shows that Haitai Confectionery&Foodsltd had ₩278.4b in debt in September 2020; about the same as the year before. On the flip side, it has ₩18.7b in cash leading to net debt of about ₩259.8b.

debt-equity-history-analysis
KOSE:A101530 Debt to Equity History January 29th 2021

How Strong Is Haitai Confectionery&Foodsltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Haitai Confectionery&Foodsltd had liabilities of ₩366.7b due within 12 months and liabilities of ₩161.9b due beyond that. Offsetting these obligations, it had cash of ₩18.7b as well as receivables valued at ₩73.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩436.8b.

The deficiency here weighs heavily on the ₩219.8b 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. At the end of the day, Haitai Confectionery&Foodsltd would probably need a major re-capitalization if its creditors were to demand repayment.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

While we wouldn't worry about Haitai Confectionery&Foodsltd's net debt to EBITDA ratio of 4.5, we think its super-low interest cover of 2.2 times is a sign of high leverage. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. More concerning, Haitai Confectionery&Foodsltd saw its EBIT drop by 6.5% in the last twelve months. If it keeps going like that paying off its debt will be like running on a treadmill -- a lot of effort for not much advancement. 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 Haitai Confectionery&Foodsltd 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Haitai Confectionery&Foodsltd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

We'd go so far as to say Haitai Confectionery&Foodsltd's level of total liabilities was disappointing. But on the bright side, its conversion of EBIT to free cash flow is a good sign, and makes us more optimistic. We're quite clear that we consider Haitai Confectionery&Foodsltd to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Haitai Confectionery&Foodsltd has 3 warning signs (and 2 which are potentially serious) we think you should know about.

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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