We Think HanJung Natural Connectivity System.co.Ltd (KOSDAQ:107640) Is Taking Some Risk With Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies HanJung Natural Connectivity System.co.,Ltd (KOSDAQ:107640) makes use of debt. But is this debt a concern to shareholders?

We've discovered 3 warning signs about HanJung Natural Connectivity System.co.Ltd. View them for free.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is HanJung Natural Connectivity System.co.Ltd's Net Debt?

The image below, which you can click on for greater detail, shows that HanJung Natural Connectivity System.co.Ltd had debt of ₩43.6b at the end of December 2024, a reduction from ₩59.7b over a year. On the flip side, it has ₩41.4b in cash leading to net debt of about ₩2.17b.

How Healthy Is HanJung Natural Connectivity System.co.Ltd's Balance Sheet?

We can see from the most recent balance sheet that HanJung Natural Connectivity System.co.Ltd had liabilities of ₩49.8b falling due within a year, and liabilities of ₩36.6b due beyond that. Offsetting this, it had ₩41.4b in cash and ₩17.7b in receivables that were due within 12 months. So it has liabilities totalling ₩27.3b more than its cash and near-term receivables, combined.

Since publicly traded HanJung Natural Connectivity System.co.Ltd shares are worth a total of ₩219.7b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Carrying virtually no net debt, HanJung Natural Connectivity System.co.Ltd has a very light debt load indeed.

Check out our latest analysis for HanJung Natural Connectivity System.co.Ltd

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While HanJung Natural Connectivity System.co.Ltd's low debt to EBITDA ratio of 0.15 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 2.6 times last year does give us pause. So we'd recommend keeping a close eye on the impact financing costs are having on the business. We also note that HanJung Natural Connectivity System.co.Ltd improved its EBIT from a last year's loss to a positive ₩9.5b. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if HanJung Natural Connectivity System.co.Ltd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, HanJung Natural Connectivity System.co.Ltd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

HanJung Natural Connectivity System.co.Ltd's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. In particular, its net debt to EBITDA was re-invigorating. We think that HanJung Natural Connectivity System.co.Ltd's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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. We've identified 3 warning signs with HanJung Natural Connectivity System.co.Ltd (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.