Does Hansol Holdings (KRX:004150) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Hansol Holdings Co., Ltd. (KRX:004150) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hansol Holdings

How Much Debt Does Hansol Holdings Carry?

The image below, which you can click on for greater detail, shows that Hansol Holdings had debt of ₩18.5b at the end of December 2020, a reduction from ₩38.3b over a year. However, its balance sheet shows it holds ₩85.8b in cash, so it actually has ₩67.3b net cash.

A Look At Hansol Holdings' Liabilities

We can see from the most recent balance sheet that Hansol Holdings had liabilities of ₩92.6b falling due within a year, and liabilities of ₩8.03b due beyond that. On the other hand, it had cash of ₩85.8b and ₩72.3b worth of receivables due within a year. So it can boast ₩57.4b more liquid assets than total liabilities.

It's good to see that Hansol Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Hansol Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Hansol Holdings has seen its EBIT plunge 17% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hansol Holdings'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hansol Holdings 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, Hansol Holdings reported free cash flow worth 8.0% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Hansol Holdings has net cash of ₩67.3b, as well as more liquid assets than liabilities. So we are not troubled with Hansol Holdings's debt use. 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 instance, we've identified 1 warning sign for Hansol Holdings that 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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