Does Shin Hwa Silup (KRX:001770) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Shin Hwa Silup Co. Ltd. (KRX:001770) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Silup

How Much Debt Does Shin Hwa Silup Carry?

As you can see below, Shin Hwa Silup had ₩13.7b of debt at June 2020, down from ₩14.7b a year prior. On the flip side, it has ₩6.43b in cash leading to net debt of about ₩7.27b.

How Healthy Is Shin Hwa Silup's Balance Sheet?

According to the last reported balance sheet, Shin Hwa Silup had liabilities of ₩24.7b due within 12 months, and liabilities of ₩1.58b due beyond 12 months. Offsetting these obligations, it had cash of ₩6.43b as well as receivables valued at ₩18.1b due within 12 months. So it has liabilities totalling ₩1.77b more than its cash and near-term receivables, combined.

Given Shin Hwa Silup has a market capitalization of ₩24.7b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shin Hwa Silup 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 Shin Hwa Silup wasn't profitable at an EBIT level, but managed to grow its revenue by 2.8%, to ₩74b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Shin Hwa Silup produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩74m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of ₩1.4b and the profit of ₩165m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. Case in point: We've spotted 3 warning signs for Shin Hwa Silup you should be aware of, and 1 of them can't be ignored.

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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