Does Huchems Fine Chemical (KRX:069260) Have A Healthy Balance Sheet?

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. 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. Importantly, Huchems Fine Chemical Corporation (KRX:069260) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Huchems Fine Chemical

What Is Huchems Fine Chemical's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2019 Huchems Fine Chemical had debt of ₩96.6b, up from ₩93.5k in one year. But on the other hand it also has ₩353.6b in cash, leading to a ₩257.0b net cash position.

A Look At Huchems Fine Chemical's Liabilities

The latest balance sheet data shows that Huchems Fine Chemical had liabilities of ₩124.9b due within a year, and liabilities of ₩76.3b falling due after that. On the other hand, it had cash of ₩353.6b and ₩77.2b worth of receivables due within a year. So it actually has ₩229.7b more liquid assets than total liabilities.

It's good to see that Huchems Fine Chemical 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 Huchems Fine Chemical has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Huchems Fine Chemical if management cannot prevent a repeat of the 34% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Huchems Fine Chemical's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Huchems Fine Chemical 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. During the last three years, Huchems Fine Chemical generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Huchems Fine Chemical has ₩257.0b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in ₩64b. So is Huchems Fine Chemical's debt a risk? It doesn't seem so to us. Given Huchems Fine Chemical has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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