Is Hanil Iron & Steel (KRX:002220) A Risky Investment?

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. We can see that Hanil Iron & Steel Co., Ltd (KRX:002220) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hanil Iron & Steel

What Is Hanil Iron & Steel's Debt?

The image below, which you can click on for greater detail, shows that Hanil Iron & Steel had debt of ₩94.1b at the end of December 2020, a reduction from ₩117.7b over a year. However, it does have ₩18.7b in cash offsetting this, leading to net debt of about ₩75.3b.

A Look At Hanil Iron & Steel's Liabilities

We can see from the most recent balance sheet that Hanil Iron & Steel had liabilities of ₩76.5b falling due within a year, and liabilities of ₩69.8b due beyond that. On the other hand, it had cash of ₩18.7b and ₩27.9b worth of receivables due within a year. So it has liabilities totalling ₩99.7b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₩71.3b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hanil Iron & Steel's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hanil Iron & Steel had a loss before interest and tax, and actually shrunk its revenue by 9.2%, to ₩157b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Hanil Iron & Steel produced an earnings before interest and tax (EBIT) loss. Indeed, it lost ₩4.2b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of ₩4.9b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 Hanil Iron & Steel has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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. 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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