Here's Why Hanchem Co (KOSDAQ:457370) 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 Hanchem Co,. Ltd. (KOSDAQ:457370) does have debt on its balance sheet. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, 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.

What Is Hanchem Co's Debt?

The image below, which you can click on for greater detail, shows that Hanchem Co had debt of ₩4.20b at the end of March 2025, a reduction from ₩7.00b over a year. But on the other hand it also has ₩30.8b in cash, leading to a ₩26.6b net cash position.

How Strong Is Hanchem Co's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hanchem Co had liabilities of ₩5.36b due within 12 months and liabilities of ₩2.00b due beyond that. On the other hand, it had cash of ₩30.8b and ₩4.86b worth of receivables due within a year. So it actually has ₩28.3b more liquid assets than total liabilities.

This excess liquidity is a great indication that Hanchem Co's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hanchem Co boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Hanchem Co

And we also note warmly that Hanchem Co grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hanchem Co's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hanchem Co 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. In the last three years, Hanchem Co created free cash flow amounting to 7.9% 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 Hanchem Co has net cash of ₩26.6b, as well as more liquid assets than liabilities. And it also grew its EBIT by 11% over the last year. So we don't think Hanchem Co'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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hanchem Co you should know about.

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.