Health Check: How Prudently Does Shin Hwa DynamicsLtd (KRX:001770) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Shin Hwa Dynamics Co.,Ltd. (KRX:001770) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Shin Hwa DynamicsLtd

How Much Debt Does Shin Hwa DynamicsLtd Carry?

The chart below, which you can click on for greater detail, shows that Shin Hwa DynamicsLtd had ₩12.0b in debt in June 2024; about the same as the year before. But it also has ₩20.5b in cash to offset that, meaning it has ₩8.54b net cash.

How Healthy Is Shin Hwa DynamicsLtd's Balance Sheet?

The latest balance sheet data shows that Shin Hwa DynamicsLtd had liabilities of ₩39.9b due within a year, and liabilities of ₩484.5m falling due after that. Offsetting these obligations, it had cash of ₩20.5b as well as receivables valued at ₩20.3b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This surplus suggests that Shin Hwa DynamicsLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Shin Hwa DynamicsLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shin Hwa DynamicsLtd's earnings that will influence how the balance sheet holds up in the future. 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.

Over 12 months, Shin Hwa DynamicsLtd made a loss at the EBIT level, and saw its revenue drop to ₩106b, which is a fall of 5.4%. We would much prefer see growth.

So How Risky Is Shin Hwa DynamicsLtd?

While Shin Hwa DynamicsLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of ₩896m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Shin Hwa DynamicsLtd .

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. 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.