Is Haesung Optics (KOSDAQ:076610) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Haesung Optics Co., Ltd. (KOSDAQ:076610) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Haesung Optics

How Much Debt Does Haesung Optics Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Haesung Optics had debt of ₩40.9b, up from ₩18.3b in one year. However, it also had ₩32.8b in cash, and so its net debt is ₩8.16b.

How Strong Is Haesung Optics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Haesung Optics had liabilities of ₩61.8b due within 12 months and liabilities of ₩17.3b due beyond that. Offsetting this, it had ₩32.8b in cash and ₩20.9b in receivables that were due within 12 months. So its liabilities total ₩25.4b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩28.7b, so it does suggest shareholders should keep an eye on Haesung Optics' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Haesung Optics 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, Haesung Optics made a loss at the EBIT level, and saw its revenue drop to ₩119b, which is a fall of 5.0%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Haesung Optics produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩2.0b. 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. Another cause for caution is that is bled ₩1.1b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Haesung Optics you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.