Is HisteelLtd (KRX:071090) Using Too Much 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 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. Importantly, Histeel Co.,Ltd. (KRX:071090) does carry debt. But should shareholders be worried about its use of debt?

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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for HisteelLtd

What Is HisteelLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that HisteelLtd had ₩78.3b in debt in June 2020; about the same as the year before. However, because it has a cash reserve of ₩38.8b, its net debt is less, at about ₩39.5b.

A Look At HisteelLtd's Liabilities

The latest balance sheet data shows that HisteelLtd had liabilities of ₩65.2b due within a year, and liabilities of ₩49.4b falling due after that. Offsetting these obligations, it had cash of ₩38.8b as well as receivables valued at ₩19.7b due within 12 months. So it has liabilities totalling ₩56.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the ₩31.3b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, HisteelLtd would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is HisteelLtd'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.

In the last year HisteelLtd had a loss before interest and tax, and actually shrunk its revenue by 25%, to ₩163b. That makes us nervous, to say the least.

Caveat Emptor

Not only did HisteelLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩4.0b. 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. For example, we would not want to see a repeat of last year's loss of ₩4.5b. In the meantime, we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with HisteelLtd (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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. 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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