Pyung Hwa Holdings (KRX: 010770) has debt but no profit; Should we be worried?

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Mostly, Pyung Hwa Holdings Co., Ltd. (KRX: 010770) bears the debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.

Check out our latest review for Pyung Hwa Holdings

What is the debt of Pyung Hwa Holdings?

As you can see below, Pyung Hwa Holdings was owed 260.9 billion yen in September 2020, roughly the same as the year before. You can click on the graph for more details. However, given that it has a cash reserve of 43.8 billion yen, its net debt is less, at around 217.1 billion yen.

KOSE: A010770 Debt to equity history March 22, 2021

How strong is Pyung Hwa Holdings’ balance sheet?

According to the latest published balance sheet, Pyung Hwa Holdings had liabilities of 379.3 billion yen due within 12 months and liabilities of 45.8 billion yen due beyond 12 months. In compensation for these obligations, he had cash of 43.8 billion yen as well as receivables valued at 104.7 billion yen within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 276.6b.

This deficit casts a shadow over society ₩ 51.6b, like a colossus towering over mere mortals. So we would be watching its record closely, no doubt. Ultimately, Pyung Hwa Holdings would likely need a major recapitalization if its creditors demanded repayment. The balance sheet is clearly the area to focus on when analyzing debt. But it is the earnings of Pyung Hwa Holdings that will influence the balance sheet in the future. So if you want to know more about his earnings, it might be worth checking out this graph of his long-term profit trend.

Year over 12 months, Pyung Hwa Holdings recorded a loss in EBIT level and saw its revenue fall to 511 billion yen, a decrease of 12%. We would much prefer to see the growth.

Emptor Warning

Not only has Pyung Hwa Holdings’ revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to 938 million euros. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, he may be able to improve his situation with a little luck and a good execution. But we think that’s unlikely as it has few liquid assets and recorded a loss of 2.8 billion yen last year. So we think this title is quite risky. We would prefer to move on. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. For example, we discovered 3 warning signs for Pyung Hwa Holdings (1 is significant!) That you should know before investing here.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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