We Think Hannong Chemicals (KRX:011500) Has A Fair Chunk Of Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Hannong Chemicals Inc. (KRX:011500) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hannong Chemicals

What Is Hannong Chemicals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hannong Chemicals had ₩41.5b of debt in December 2023, down from ₩47.9b, one year before. On the flip side, it has ₩14.1b in cash leading to net debt of about ₩27.4b.

How Healthy Is Hannong Chemicals' Balance Sheet?

We can see from the most recent balance sheet that Hannong Chemicals had liabilities of ₩31.9b falling due within a year, and liabilities of ₩42.8b due beyond that. Offsetting these obligations, it had cash of ₩14.1b as well as receivables valued at ₩46.3b due within 12 months. So it has liabilities totalling ₩14.4b more than its cash and near-term receivables, combined.

Since publicly traded Hannong Chemicals shares are worth a total of ₩307.4b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hannong Chemicals 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.

In the last year Hannong Chemicals had a loss before interest and tax, and actually shrunk its revenue by 11%, to ₩212b. We would much prefer see growth.

Caveat Emptor

While Hannong Chemicals's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost ₩2.4b at the EBIT level. 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. Surprisingly, we note that it actually reported positive free cash flow of ₩15b and a profit of ₩12b. So one might argue that there's still a chance it can get things on the right track. 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. For example - Hannong Chemicals has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.