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.' 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. We note that Histeel Co.,Ltd. (KRX:071090) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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

How Much Debt Does HisteelLtd Carry?

The chart below, which you can click on for greater detail, shows that HisteelLtd had ₩78.6b in debt in September 2020; about the same as the year before. However, it also had ₩37.1b in cash, and so its net debt is ₩41.5b.

How Strong Is HisteelLtd's Balance Sheet?

The latest balance sheet data shows that HisteelLtd had liabilities of ₩63.9b due within a year, and liabilities of ₩48.1b falling due after that. Offsetting these obligations, it had cash of ₩37.1b as well as receivables valued at ₩16.1b due within 12 months. So its liabilities total ₩58.9b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩41.5b 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HisteelLtd will need earnings to service that debt. 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.

Over 12 months, HisteelLtd made a loss at the EBIT level, and saw its revenue drop to ₩157b, which is a fall of 25%. 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). To be specific the EBIT loss came in at ₩2.1b. When we look at that alongside the significant liabilities, we're not particularly confident 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 ₩3.4b. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with HisteelLtd (including 1 which doesn't sit too well with us) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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