Heng Sheng Holding Group (KOSDAQ:900270) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Heng Sheng Holding Group Limited (KOSDAQ:900270) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Heng Sheng Holding Group

How Much Debt Does Heng Sheng Holding Group Carry?

As you can see below, Heng Sheng Holding Group had ₩37.8b of debt at September 2020, down from ₩39.8b a year prior. But it also has ₩194.0b in cash to offset that, meaning it has ₩156.2b net cash.

A Look At Heng Sheng Holding Group's Liabilities

The latest balance sheet data shows that Heng Sheng Holding Group had liabilities of ₩66.1b due within a year, and liabilities of ₩635.1m falling due after that. Offsetting these obligations, it had cash of ₩194.0b as well as receivables valued at ₩97.2b due within 12 months. So it can boast ₩224.4b more liquid assets than total liabilities.

This excess liquidity is a great indication that Heng Sheng Holding Group's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Heng Sheng Holding Group has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Heng Sheng Holding Group's load is not too heavy, because its EBIT was down 39% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Heng Sheng Holding Group 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. During the last three years, Heng Sheng Holding Group produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, the bottom line is that Heng Sheng Holding Group has net cash of ₩156.2b and plenty of liquid assets. So we don't think Heng Sheng Holding Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Heng Sheng Holding Group has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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