Is HFR (KOSDAQ:230240) Using Debt Sensibly?

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.' 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. We can see that HFR, Inc. (KOSDAQ:230240) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for HFR

What Is HFR's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 HFR had ₩62.0b of debt, an increase on ₩45.7b, over one year. However, its balance sheet shows it holds ₩73.1b in cash, so it actually has ₩11.1b net cash.

How Strong Is HFR's Balance Sheet?

We can see from the most recent balance sheet that HFR had liabilities of ₩73.3b falling due within a year, and liabilities of ₩31.4b due beyond that. Offsetting this, it had ₩73.1b in cash and ₩29.2b in receivables that were due within 12 months. So it has liabilities totalling ₩2.42b more than its cash and near-term receivables, combined.

Since publicly traded HFR shares are worth a total of ₩104.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, HFR also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 HFR 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.

In the last year HFR had a loss before interest and tax, and actually shrunk its revenue by 46%, to ₩159b. To be frank that doesn't bode well.

So How Risky Is HFR?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months HFR lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩43b of cash and made a loss of ₩23b. Given it only has net cash of ₩11.1b, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that HFR is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.