We Think Chunil Express (KRX:000650) Has A Fair Chunk Of 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.' 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. We can see that Chunil Express Co., Ltd. (KRX:000650) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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.

Check out 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 does have ₩7.99b in cash offsetting this, leading to net debt of about ₩3.95b.

How Strong Is Chunil Express's Balance Sheet?

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. Offsetting this, it had ₩7.99b in cash and ₩1.19b in receivables that were due within 12 months. So it has liabilities totalling ₩23.2b more than its cash and near-term receivables, combined.

Given Chunil Express has a market capitalization of ₩117.7b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is Chunil Express'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.

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%. That makes us nervous, to say the least.

Caveat Emptor

While Chunil Express's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩6.4b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₩3.9b. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Chunil Express (including 1 which is can't be ignored) .

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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