Would HanWool Materials Science (KOSDAQ:091440) Be Better Off With Less 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.' 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, HanWool Materials Science, Inc. (KOSDAQ:091440) does carry debt. But is this debt a concern to shareholders?

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When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is HanWool Materials Science's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 HanWool Materials Science had ₩56.9b of debt, an increase on ₩9.30b, over one year. However, it does have ₩19.8b in cash offsetting this, leading to net debt of about ₩37.1b.

How Healthy Is HanWool Materials Science's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HanWool Materials Science had liabilities of ₩24.6b due within 12 months and liabilities of ₩55.7b due beyond that. Offsetting these obligations, it had cash of ₩19.8b as well as receivables valued at ₩5.15b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩55.4b.

This is a mountain of leverage relative to its market capitalization of ₩88.0b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HanWool Materials Science 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.

See our latest analysis for HanWool Materials Science

In the last year HanWool Materials Science had a loss before interest and tax, and actually shrunk its revenue by 54%, to ₩17b. To be frank that doesn't bode well.

Caveat Emptor

While HanWool Materials Science's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩13b. 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. However, it doesn't help that it burned through ₩28b of cash over the last year. So in short it's a really risky stock. 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. We've identified 5 warning signs with HanWool Materials Science (at least 4 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.