HANJOO ARTLTD (KOSDAQ:058450) Is Carrying A Fair Bit Of Debt

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 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. Importantly, HANJOO ART Co.,LTD. (KOSDAQ:058450) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for HANJOO ARTLTD

What Is HANJOO ARTLTD's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 HANJOO ARTLTD had debt of ₩14.0b, up from ₩9.98b in one year. On the flip side, it has ₩12.9b in cash leading to net debt of about ₩1.10b.

How Healthy Is HANJOO ARTLTD's Balance Sheet?

According to the last reported balance sheet, HANJOO ARTLTD had liabilities of ₩23.9b due within 12 months, and liabilities of ₩331.0m due beyond 12 months. On the other hand, it had cash of ₩12.9b and ₩9.74b worth of receivables due within a year. So its liabilities total ₩1.61b more than the combination of its cash and short-term receivables.

Given HANJOO ARTLTD has a market capitalization of ₩32.1b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HANJOO ARTLTD will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year HANJOO ARTLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 107%, to ₩13b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Despite the top line growth, HANJOO ARTLTD still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₩4.7b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩625m in negative free cash flow over the last twelve months. So to be blunt we think it is 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. Case in point: We've spotted 4 warning signs for HANJOO ARTLTD you should be aware of, and 1 of them is a bit concerning.

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. 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.