Is Hanssem (KRX:009240) A Risky Investment?

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.' 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, Hanssem Co., Ltd. (KRX:009240) does carry debt. But the real question is whether this debt is making the company risky.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hanssem

What Is Hanssem's Debt?

As you can see below, at the end of March 2024, Hanssem had ₩94.1b of debt, up from ₩79.8b a year ago. Click the image for more detail. However, it does have ₩129.5b in cash offsetting this, leading to net cash of ₩35.5b.

How Strong Is Hanssem's Balance Sheet?

According to the last reported balance sheet, Hanssem had liabilities of ₩477.5b due within 12 months, and liabilities of ₩189.4b due beyond 12 months. Offsetting this, it had ₩129.5b in cash and ₩135.9b in receivables that were due within 12 months. So its liabilities total ₩401.4b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Hanssem is worth ₩949.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

We also note that Hanssem improved its EBIT from a last year's loss to a positive ₩31b. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hanssem 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. Over the last year, Hanssem actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Hanssem does have more liabilities than liquid assets, it also has net cash of ₩35.5b. And it impressed us with free cash flow of ₩80b, being 261% of its EBIT. So we are not troubled with Hanssem's debt use. 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 - Hanssem has 1 warning sign we think you should be aware of.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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