Health Check: How Prudently Does Hyunwoo Industrial (KOSDAQ:092300) 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hyunwoo Industrial Co., LTD (KOSDAQ:092300) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Hyunwoo Industrial

What Is Hyunwoo Industrial's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Hyunwoo Industrial had ₩76.6b of debt, an increase on ₩49.1b, over one year. However, it also had ₩14.1b in cash, and so its net debt is ₩62.5b.

How Healthy Is Hyunwoo Industrial's Balance Sheet?

According to the last reported balance sheet, Hyunwoo Industrial had liabilities of ₩81.7b due within 12 months, and liabilities of ₩36.7b due beyond 12 months. Offsetting these obligations, it had cash of ₩14.1b as well as receivables valued at ₩30.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩74.0b.

When you consider that this deficiency exceeds the company's ₩70.4b 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. There's no doubt that we learn most about debt from the balance sheet. But it is Hyunwoo Industrial's earnings that will influence how the balance sheet holds up in the future. 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 Hyunwoo Industrial had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to ₩156b. We would much prefer see growth.

Caveat Emptor

Importantly, Hyunwoo Industrial had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₩771m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₩22b in negative free cash flow over the last year. That means it's on the risky side of things. 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. For example Hyunwoo Industrial has 5 warning signs (and 2 which are significant) 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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