Does HanmiGlobal (KRX:053690) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 HanmiGlobal Co., Ltd. (KRX:053690) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for HanmiGlobal

What Is HanmiGlobal's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 HanmiGlobal had debt of ₩29.4b, up from ₩11.3b in one year. But it also has ₩55.2b in cash to offset that, meaning it has ₩25.8b net cash.

How Strong Is HanmiGlobal's Balance Sheet?

According to the last reported balance sheet, HanmiGlobal had liabilities of ₩55.7b due within 12 months, and liabilities of ₩30.3b due beyond 12 months. On the other hand, it had cash of ₩55.2b and ₩56.4b worth of receivables due within a year. So it actually has ₩25.7b more liquid assets than total liabilities.

It's good to see that HanmiGlobal has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that HanmiGlobal has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that HanmiGlobal's load is not too heavy, because its EBIT was down 43% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since HanmiGlobal 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. HanmiGlobal may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, HanmiGlobal actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case HanmiGlobal has ₩25.8b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩8.2b, being 105% of its EBIT. So we don't think HanmiGlobal's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for HanmiGlobal you should know about.

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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