Hankook Cosmetics (KRX:123690) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Hankook Cosmetics Co., Ltd. (KRX:123690) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hankook Cosmetics

What Is Hankook Cosmetics's Net Debt?

The chart below, which you can click on for greater detail, shows that Hankook Cosmetics had ₩2.60b in debt in March 2024; about the same as the year before. But it also has ₩16.7b in cash to offset that, meaning it has ₩14.1b net cash.

How Strong Is Hankook Cosmetics' Balance Sheet?

The latest balance sheet data shows that Hankook Cosmetics had liabilities of ₩22.1b due within a year, and liabilities of ₩3.99b falling due after that. On the other hand, it had cash of ₩16.7b and ₩7.22b worth of receivables due within a year. So it has liabilities totalling ₩2.15b more than its cash and near-term receivables, combined.

This state of affairs indicates that Hankook Cosmetics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩143.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. 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.

Although Hankook Cosmetics made a loss at the EBIT level, last year, it was also good to see that it generated ₩4.4b in EBIT over the last twelve months. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 year, Hankook Cosmetics 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hankook Cosmetics has ₩14.1b in net cash. The cherry on top was that in converted 110% of that EBIT to free cash flow, bringing in ₩4.8b. So is Hankook Cosmetics's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Hankook Cosmetics you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com