Is Shinhwa Contech (KOSDAQ:187270) A Risky Investment?

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 Shinhwa Contech Co., Ltd (KOSDAQ:187270) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shinhwa Contech

What Is Shinhwa Contech's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Shinhwa Contech had debt of ₩36.2b, up from ₩31.4b in one year. However, it also had ₩17.5b in cash, and so its net debt is ₩18.7b.

How Healthy Is Shinhwa Contech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shinhwa Contech had liabilities of ₩34.8b due within 12 months and liabilities of ₩11.5b due beyond that. On the other hand, it had cash of ₩17.5b and ₩8.96b worth of receivables due within a year. So its liabilities total ₩19.9b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩31.2b, so it does suggest shareholders should keep an eye on Shinhwa Contech's use of debt. 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 it is Shinhwa Contech'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.

In the last year Shinhwa Contech wasn't profitable at an EBIT level, but managed to grow its revenue by 4.3%, to ₩43b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Shinhwa Contech had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩787m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩175m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Shinhwa Contech (including 2 which are concerning) .

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. 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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