Hanssem (KRX:009240) Could Easily Take On More Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Hanssem Co., Ltd. (KRX:009240) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hanssem

What Is Hanssem's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hanssem had ₩69.7b of debt in December 2020, down from ₩117.7b, one year before. But it also has ₩289.5b in cash to offset that, meaning it has ₩219.8b net cash.

How Healthy Is Hanssem's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hanssem had liabilities of ₩439.5b due within 12 months and liabilities of ₩161.1b due beyond that. Offsetting these obligations, it had cash of ₩289.5b as well as receivables valued at ₩122.1b due within 12 months. So its liabilities total ₩189.1b more than the combination of its cash and short-term receivables.

Given Hanssem has a market capitalization of ₩2.03t, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hanssem also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Hanssem grew its EBIT by 68% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hanssem's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hanssem 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. Over the last three years, Hanssem actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

We could understand if investors are concerned about Hanssem's liabilities, but we can be reassured by the fact it has has net cash of ₩219.8b. The cherry on top was that in converted 138% of that EBIT to free cash flow, bringing in ₩175b. So is Hanssem's debt a risk? It doesn't seem so to us. 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. Be aware that Hanssem is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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