Is Husteel (KRX:005010) A Risky Investment?

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 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 Husteel Co., Ltd. (KRX:005010) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Husteel

How Much Debt Does Husteel Carry?

As you can see below, Husteel had ₩131.0b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₩140.7b in cash, so it actually has ₩9.68b net cash.

How Healthy Is Husteel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Husteel had liabilities of ₩142.2b due within 12 months and liabilities of ₩172.8b due beyond that. On the other hand, it had cash of ₩140.7b and ₩120.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩53.7b.

Given Husteel has a market capitalization of ₩275.0b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Husteel boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Husteel 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.

Over 12 months, Husteel made a loss at the EBIT level, and saw its revenue drop to ₩719b, which is a fall of 23%. To be frank that doesn't bode well.

So How Risky Is Husteel?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Husteel had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩83b of cash and made a loss of ₩1.7b. Given it only has net cash of ₩9.68b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. We've identified 1 warning sign with Husteel , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.