Hankook Cosmetics (KRX:123690) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Hankook Cosmetics Co., Ltd. (KRX:123690) does carry debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Hankook Cosmetics's Net Debt?

The chart below, which you can click on for greater detail, shows that Hankook Cosmetics had ₩2.63b in debt in December 2024; about the same as the year before. But it also has ₩16.3b in cash to offset that, meaning it has ₩13.7b net cash.

How Strong Is Hankook Cosmetics' Balance Sheet?

The latest balance sheet data shows that Hankook Cosmetics had liabilities of ₩23.6b due within a year, and liabilities of ₩3.90b falling due after that. Offsetting this, it had ₩16.3b in cash and ₩7.06b in receivables that were due within 12 months. So it has liabilities totalling ₩4.14b more than its cash and near-term receivables, combined.

Of course, Hankook Cosmetics has a market capitalization of ₩109.7b, so these liabilities are probably manageable. 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, Hankook Cosmetics also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Hankook Cosmetics

In addition to that, we're happy to report that Hankook Cosmetics has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hankook Cosmetics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hankook Cosmetics 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 two years, Hankook Cosmetics recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hankook Cosmetics has ₩13.7b in net cash. And it impressed us with free cash flow of ₩1.7b, being 88% of its EBIT. So is Hankook Cosmetics'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. For example - Hankook Cosmetics has 1 warning sign we think you should be aware of.

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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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.