Ildong Holdings (KRX:000230) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Ildong Holdings Co., Ltd. (KRX:000230) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ildong Holdings

How Much Debt Does Ildong Holdings Carry?

The chart below, which you can click on for greater detail, shows that Ildong Holdings had ₩241.8b in debt in September 2020; about the same as the year before. However, it also had ₩96.2b in cash, and so its net debt is ₩145.6b.

How Strong Is Ildong Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ildong Holdings had liabilities of ₩308.1b due within 12 months and liabilities of ₩161.9b due beyond that. On the other hand, it had cash of ₩96.2b and ₩71.9b worth of receivables due within a year. So its liabilities total ₩301.9b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩189.1b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Ildong Holdings would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ildong Holdings'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, Ildong Holdings reported revenue of ₩586b, which is a gain of 246%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

While we can certainly appreciate Ildong Holdings's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost ₩18b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₩7.7b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ildong Holdings is showing 2 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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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