Hanil Chemical Ind (KOSDAQ:007770) Is Making Moderate Use Of Debt

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. Importantly, Hanil Chemical Ind. Co., Ltd. (KOSDAQ:007770) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hanil Chemical Ind

What Is Hanil Chemical Ind's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Hanil Chemical Ind had debt of ₩20.9b, up from ₩19.1b in one year. However, it also had ₩9.61b in cash, and so its net debt is ₩11.3b.

How Healthy Is Hanil Chemical Ind's Balance Sheet?

We can see from the most recent balance sheet that Hanil Chemical Ind had liabilities of ₩29.9b falling due within a year, and liabilities of ₩5.12b due beyond that. Offsetting this, it had ₩9.61b in cash and ₩19.8b in receivables that were due within 12 months. So its liabilities total ₩5.57b more than the combination of its cash and short-term receivables.

Of course, Hanil Chemical Ind has a market capitalization of ₩42.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Hanil Chemical Ind'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.

In the last year Hanil Chemical Ind had a loss before interest and tax, and actually shrunk its revenue by 6.1%, to ₩120b. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Hanil Chemical Ind produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩8.1b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩2.4b of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Hanil Chemical Ind you should be aware of, and 1 of them is significant.

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.