Humax Holdings (KOSDAQ:028080) Is Carrying A Fair Bit Of 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, Humax Holdings Co., Ltd. (KOSDAQ:028080) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Humax Holdings

How Much Debt Does Humax Holdings Carry?

The chart below, which you can click on for greater detail, shows that Humax Holdings had ₩14.0b in debt in June 2020; about the same as the year before. However, it also had ₩1.47b in cash, and so its net debt is ₩12.5b.

How Healthy Is Humax Holdings's Balance Sheet?

We can see from the most recent balance sheet that Humax Holdings had liabilities of ₩14.2b falling due within a year, and liabilities of ₩2.06b due beyond that. On the other hand, it had cash of ₩1.47b and ₩19.3b worth of receivables due within a year. So it actually has ₩4.48b more liquid assets than total liabilities.

This short term liquidity is a sign that Humax Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Humax Holdings 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.

Over 12 months, Humax Holdings made a loss at the EBIT level, and saw its revenue drop to ₩5.5b, which is a fall of 11%. That's not what we would hope to see.

Caveat Emptor

While Humax Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable ₩14b at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. This one is a bit too risky for our liking. 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. Case in point: We've spotted 3 warning signs for Humax Holdings you should be aware of.

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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