Heng Sheng Holding Group (KOSDAQ:900270) Has A Rock Solid 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Heng Sheng Holding Group Limited (KOSDAQ:900270) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Heng Sheng Holding Group

What Is Heng Sheng Holding Group's Net Debt?

As you can see below, Heng Sheng Holding Group had ₩39.3b of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has ₩192.6b in cash to offset that, meaning it has ₩153.3b net cash.

How Healthy Is Heng Sheng Holding Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Heng Sheng Holding Group had liabilities of ₩62.0b due within 12 months and liabilities of ₩736.9m due beyond that. Offsetting this, it had ₩192.6b in cash and ₩87.6b in receivables that were due within 12 months. So it actually has ₩217.5b more liquid assets than total liabilities.

This excess liquidity is a great indication that Heng Sheng Holding Group's balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Heng Sheng Holding Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Heng Sheng Holding Group saw its EBIT drop by 9.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Heng Sheng Holding Group 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. Heng Sheng Holding Group 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. Looking at the most recent three years, Heng Sheng Holding Group recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Heng Sheng Holding Group has ₩153.3b in net cash and a strong balance sheet. So is Heng Sheng Holding Group's debt a risk? It doesn't seem so to us. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Heng Sheng Holding Group (of which 1 makes us a bit uncomfortable!) you should know about.

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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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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