Does Hankook Cosmetics (KRX:123690) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Hankook Cosmetics Co., Ltd. (KRX:123690) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Hankook Cosmetics

What Is Hankook Cosmetics's Net Debt?

The image below, which you can click on for greater detail, shows that Hankook Cosmetics had debt of ₩2.19b at the end of September 2020, a reduction from ₩7.83b over a year. However, its balance sheet shows it holds ₩26.7b in cash, so it actually has ₩24.5b net cash.

A Look At Hankook Cosmetics' Liabilities

We can see from the most recent balance sheet that Hankook Cosmetics had liabilities of ₩38.4b falling due within a year, and liabilities of ₩7.74b due beyond that. On the other hand, it had cash of ₩26.7b and ₩8.47b worth of receivables due within a year. So its liabilities total ₩11.0b more than the combination of its cash and short-term receivables.

Given Hankook Cosmetics has a market capitalization of ₩200.0b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Hankook Cosmetics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Hankook Cosmetics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Hankook Cosmetics made a loss at the EBIT level, and saw its revenue drop to ₩88b, which is a fall of 39%. That makes us nervous, to say the least.

So How Risky Is Hankook Cosmetics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Hankook Cosmetics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩1.7b and booked a ₩7.4b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of ₩24.5b. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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, we've discovered 1 warning sign for Hankook Cosmetics that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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