Is HANDSOME (KRX:020000) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that HANDSOME Corp. (KRX:020000) does use debt in its business. 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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for HANDSOME

What Is HANDSOME's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 HANDSOME had debt of ₩33.3b, up from ₩2.89b in one year. However, its balance sheet shows it holds ₩282.6b in cash, so it actually has ₩249.3b net cash.

How Strong Is HANDSOME's Balance Sheet?

We can see from the most recent balance sheet that HANDSOME had liabilities of ₩230.9b falling due within a year, and liabilities of ₩81.6b due beyond that. On the other hand, it had cash of ₩282.6b and ₩85.8b worth of receivables due within a year. So it can boast ₩56.0b more liquid assets than total liabilities.

This short term liquidity is a sign that HANDSOME could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that HANDSOME has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, HANDSOME saw its EBIT drop by 4.2% 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 ultimately the future profitability of the business will decide if HANDSOME can strengthen its balance sheet over time. 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 HANDSOME 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. Happily for any shareholders, HANDSOME actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case HANDSOME has ₩249.3b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩110b, being 133% of its EBIT. So we don't think HANDSOME'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. To that end, you should be aware of the 1 warning sign we've spotted with HANDSOME .

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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