Here's Why Hankook Cosmetics (KRX:123690) Can Manage Its Debt Responsibly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Hankook Cosmetics Co., Ltd. (KRX:123690) does have debt on its balance sheet. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Hankook Cosmetics's Net Debt?

As you can see below, Hankook Cosmetics had ₩2.60b of debt, at March 2025, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩19.6b in cash offsetting this, leading to net cash of ₩17.0b.

How Healthy Is Hankook Cosmetics' Balance Sheet?

According to the last reported balance sheet, Hankook Cosmetics had liabilities of ₩23.8b due within 12 months, and liabilities of ₩3.96b due beyond 12 months. On the other hand, it had cash of ₩19.6b and ₩7.38b worth of receivables due within a year. So its liabilities total ₩862.2m more than the combination of its cash and short-term receivables.

Having regard to Hankook Cosmetics' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the ₩181.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Hankook Cosmetics boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Hankook Cosmetics

The modesty of its debt load may become crucial for Hankook Cosmetics if management cannot prevent a repeat of the 30% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hankook Cosmetics will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. Happily for any shareholders, Hankook Cosmetics actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hankook Cosmetics has ₩17.0b in net cash. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in ₩3.2b. So we don't have any problem with Hankook Cosmetics's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hankook Cosmetics is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.