HLB Power (KOSDAQ:043220) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 HLB Power Co., Ltd. (KOSDAQ:043220) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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.

See our latest analysis for HLB Power

What Is HLB Power's Debt?

You can click the graphic below for the historical numbers, but it shows that HLB Power had ₩9.11b of debt in September 2020, down from ₩30.0b, one year before. However, its balance sheet shows it holds ₩16.9b in cash, so it actually has ₩7.81b net cash.

How Strong Is HLB Power's Balance Sheet?

According to the last reported balance sheet, HLB Power had liabilities of ₩9.53b due within 12 months, and liabilities of ₩9.92b due beyond 12 months. Offsetting these obligations, it had cash of ₩16.9b as well as receivables valued at ₩8.37b due within 12 months. So it actually has ₩5.84b more liquid assets than total liabilities.

This short term liquidity is a sign that HLB Power could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, HLB Power boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that HLB Power improved its EBIT from a last year's loss to a positive ₩2.5b. There's no doubt that we learn most about debt from the balance sheet. But it is HLB Power'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While HLB Power has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, HLB Power actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case HLB Power has ₩7.81b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 367% of that EBIT to free cash flow, bringing in ₩9.2b. So we are not troubled with HLB Power's debt use. 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. To that end, you should be aware of the 3 warning signs we've spotted with HLB Power .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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