Chunil Express (KRX:000650) Is Making Moderate Use Of Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Chunil Express Co., Ltd. (KRX:000650) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Chunil Express

What Is Chunil Express's Debt?

As you can see below, at the end of September 2020, Chunil Express had ₩11.9b of debt, up from ₩6.77b a year ago. Click the image for more detail. However, it also had ₩7.99b in cash, and so its net debt is ₩3.95b.

A Look At Chunil Express' Liabilities

The latest balance sheet data shows that Chunil Express had liabilities of ₩9.54b due within a year, and liabilities of ₩22.8b falling due after that. On the other hand, it had cash of ₩7.99b and ₩1.19b worth of receivables due within a year. So its liabilities total ₩23.2b more than the combination of its cash and short-term receivables.

Chunil Express has a market capitalization of ₩92.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Chunil Express will need earnings to service that debt. 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.

Over 12 months, Chunil Express made a loss at the EBIT level, and saw its revenue drop to ₩40b, which is a fall of 32%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Chunil Express's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at ₩6.4b. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₩3.9b into a profit. So to be blunt we do think it is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Chunil Express (including 1 which can't be ignored) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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