HANBIT SOFT (KOSDAQ:047080) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, HANBIT SOFT Inc. (KOSDAQ:047080) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 HANBIT SOFT

What Is HANBIT SOFT's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 HANBIT SOFT had ₩8.85b of debt, an increase on ₩836.4m, over one year. However, it also had ₩4.38b in cash, and so its net debt is ₩4.47b.

How Strong Is HANBIT SOFT's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HANBIT SOFT had liabilities of ₩14.6b due within 12 months and liabilities of ₩10.3b due beyond that. Offsetting this, it had ₩4.38b in cash and ₩7.51b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩13.0b.

Of course, HANBIT SOFT has a market capitalization of ₩85.4b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HANBIT SOFT 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.

In the last year HANBIT SOFT wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to ₩51b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, HANBIT SOFT still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩112m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩6.1b of cash over the last year. So suffice it to say we consider the stock very 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. Take risks, for example - HANBIT SOFT has 2 warning signs (and 1 which is a bit unpleasant) 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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