Is HFR (KOSDAQ:230240) Weighed On By Its Debt Load?

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. As with many other companies HFR, Inc. (KOSDAQ:230240) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for HFR

What Is HFR's Debt?

As you can see below, HFR had ₩65.4b of debt at March 2024, down from ₩71.5b a year prior. But it also has ₩98.0b in cash to offset that, meaning it has ₩32.7b net cash.

How Strong Is HFR's Balance Sheet?

According to the last reported balance sheet, HFR had liabilities of ₩77.1b due within 12 months, and liabilities of ₩37.2b due beyond 12 months. Offsetting this, it had ₩98.0b in cash and ₩28.3b in receivables that were due within 12 months. So it actually has ₩12.0b more liquid assets than total liabilities.

This short term liquidity is a sign that HFR could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that HFR has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, HFR made a loss at the EBIT level, and saw its revenue drop to ₩159b, which is a fall of 56%. To be frank that doesn't bode well.

So How Risky Is HFR?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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 ₩38b of cash and made a loss of ₩10b. Given it only has net cash of ₩32.7b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for HFR that you should be aware of.

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.

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