HyosungONBCo.Ltd (KOSDAQ:097870) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that HyosungONBCo.,Ltd (KOSDAQ:097870) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for HyosungONBCo.Ltd

What Is HyosungONBCo.Ltd's Debt?

As you can see below, HyosungONBCo.Ltd had ₩2.72b of debt at December 2020, down from ₩5.52b a year prior. But on the other hand it also has ₩12.3b in cash, leading to a ₩9.55b net cash position.

How Healthy Is HyosungONBCo.Ltd's Balance Sheet?

According to the last reported balance sheet, HyosungONBCo.Ltd had liabilities of ₩5.81b due within 12 months, and liabilities of ₩1.48b due beyond 12 months. On the other hand, it had cash of ₩12.3b and ₩5.26b worth of receivables due within a year. So it actually has ₩10.2b more liquid assets than total liabilities.

It's good to see that HyosungONBCo.Ltd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that HyosungONBCo.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, HyosungONBCo.Ltd saw its EBIT drop by 5.2% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HyosungONBCo.Ltd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. HyosungONBCo.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. Over the last three years, HyosungONBCo.Ltd 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 we empathize with investors who find debt concerning, you should keep in mind that HyosungONBCo.Ltd has net cash of ₩9.55b, as well as more liquid assets than liabilities. The cherry on top was that in converted 152% of that EBIT to free cash flow, bringing in ₩4.9b. So we don't think HyosungONBCo.Ltd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for HyosungONBCo.Ltd (1 can't be ignored!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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