Would HB TechnologyLTD (KOSDAQ:078150) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, HB Technology CO.,LTD. (KOSDAQ:078150) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for HB TechnologyLTD

What Is HB TechnologyLTD's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 HB TechnologyLTD had debt of ₩41.2b, up from ₩22.8b in one year. However, it does have ₩26.1b in cash offsetting this, leading to net debt of about ₩15.1b.

How Strong Is HB TechnologyLTD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HB TechnologyLTD had liabilities of ₩53.9b due within 12 months and liabilities of ₩36.0b due beyond that. Offsetting these obligations, it had cash of ₩26.1b as well as receivables valued at ₩20.7b due within 12 months. So its liabilities total ₩43.0b more than the combination of its cash and short-term receivables.

Since publicly traded HB TechnologyLTD shares are worth a total of ₩236.8b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HB TechnologyLTD 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 HB TechnologyLTD had a loss before interest and tax, and actually shrunk its revenue by 36%, to ₩105b. To be frank that doesn't bode well.

Caveat Emptor

Not only did HB TechnologyLTD's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩67b at the EBIT level. 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. Surprisingly, we note that it actually reported positive free cash flow of ₩22b and a profit of ₩23b. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. 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. For example, we've discovered 2 warning signs for HB TechnologyLTD that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.