Is Hanchang Ind.Co.Ltd (KOSDAQ:079170) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Hanchang Ind.Co.,Ltd (KOSDAQ:079170) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hanchang Ind.Co.Ltd

What Is Hanchang Ind.Co.Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that Hanchang Ind.Co.Ltd had ₩4.39b of debt in June 2024, down from ₩6.53b, one year before. But it also has ₩10.6b in cash to offset that, meaning it has ₩6.19b net cash.

How Strong Is Hanchang Ind.Co.Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hanchang Ind.Co.Ltd had liabilities of ₩14.8b due within 12 months and liabilities of ₩6.51b due beyond that. On the other hand, it had cash of ₩10.6b and ₩23.6b worth of receivables due within a year. So it actually has ₩12.9b more liquid assets than total liabilities.

This excess liquidity is a great indication that Hanchang Ind.Co.Ltd's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Hanchang Ind.Co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Hanchang Ind.Co.Ltd has boosted its EBIT by 93%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hanchang Ind.Co.Ltd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hanchang Ind.Co.Ltd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Hanchang Ind.Co.Ltd created free cash flow amounting to 2.8% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hanchang Ind.Co.Ltd has net cash of ₩6.19b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 93% over the last year. So is Hanchang Ind.Co.Ltd's debt a risk? It doesn't seem so to us. 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 1 warning sign for Hanchang Ind.Co.Ltd 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.