Health Check: How Prudently Does Choil Aluminum (KRX:018470) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Choil Aluminum Co., Ltd. (KRX:018470) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Choil Aluminum

What Is Choil Aluminum's Net Debt?

As you can see below, at the end of September 2020, Choil Aluminum had ₩148.9b of debt, up from ₩142.3b a year ago. Click the image for more detail. However, it also had ₩27.4b in cash, and so its net debt is ₩121.4b.

How Healthy Is Choil Aluminum's Balance Sheet?

We can see from the most recent balance sheet that Choil Aluminum had liabilities of ₩143.3b falling due within a year, and liabilities of ₩29.9b due beyond that. On the other hand, it had cash of ₩27.4b and ₩60.7b worth of receivables due within a year. So its liabilities total ₩85.1b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the ₩51.8b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Choil Aluminum would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Choil Aluminum'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.

Over 12 months, Choil Aluminum reported revenue of ₩326b, which is a gain of 4.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Choil Aluminum produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩8.6b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₩9.8b over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Choil Aluminum is showing 4 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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