Health Check: How Prudently Does Haesung Optics (KOSDAQ:076610) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Haesung Optics Co., Ltd. (KOSDAQ:076610) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Haesung Optics

What Is Haesung Optics's Net Debt?

The image below, which you can click on for greater detail, shows that Haesung Optics had debt of ₩44.4b at the end of December 2020, a reduction from ₩58.4b over a year. However, it does have ₩10.5b in cash offsetting this, leading to net debt of about ₩33.8b.

How Healthy Is Haesung Optics' Balance Sheet?

We can see from the most recent balance sheet that Haesung Optics had liabilities of ₩95.9b falling due within a year, and liabilities of ₩5.17b due beyond that. Offsetting these obligations, it had cash of ₩10.5b as well as receivables valued at ₩10.8b due within 12 months. So its liabilities total ₩79.8b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩54.1b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Haesung Optics will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Haesung Optics had a loss before interest and tax, and actually shrunk its revenue by 39%, to ₩212b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Haesung Optics'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 ₩40b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₩48b. And until that time we think this is a risky stock. 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 example Haesung Optics has 4 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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