Is Humax Holdings (KOSDAQ:028080) Using Too Much 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.' 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. As with many other companies Humax Holdings Co., Ltd. (KOSDAQ:028080) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Humax Holdings

How Much Debt Does Humax Holdings Carry?

As you can see below, at the end of September 2020, Humax Holdings had ₩20.0b of debt, up from ₩14.0b a year ago. Click the image for more detail. On the flip side, it has ₩7.17b in cash leading to net debt of about ₩12.8b.

How Healthy Is Humax Holdings' Balance Sheet?

We can see from the most recent balance sheet that Humax Holdings had liabilities of ₩21.5b falling due within a year, and liabilities of ₩2.10b due beyond that. On the other hand, it had cash of ₩7.17b and ₩8.39b worth of receivables due within a year. So it has liabilities totalling ₩8.02b more than its cash and near-term receivables, combined.

Since publicly traded Humax Holdings shares are worth a total of ₩40.7b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Humax 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, Humax Holdings made a loss at the EBIT level, and saw its revenue drop to ₩4.6b, which is a fall of 40%. That makes us nervous, to say the least.

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 ₩4.3b 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₩11b. So we do think this stock is quite 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. For instance, we've identified 3 warning signs for Humax Holdings that 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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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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