Is Huchems Fine Chemical (KRX:069260) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Huchems Fine Chemical Corporation (KRX:069260) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Huchems Fine Chemical

What Is Huchems Fine Chemical's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Huchems Fine Chemical had ₩54.9b of debt in December 2020, down from ₩121.6b, one year before. But it also has ₩321.3b in cash to offset that, meaning it has ₩266.4b net cash.

How Strong Is Huchems Fine Chemical's Balance Sheet?

The latest balance sheet data shows that Huchems Fine Chemical had liabilities of ₩90.8b due within a year, and liabilities of ₩88.6b falling due after that. Offsetting this, it had ₩321.3b in cash and ₩71.3b in receivables that were due within 12 months. So it actually has ₩213.2b more liquid assets than total liabilities.

This excess liquidity suggests that Huchems Fine Chemical is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues 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.

On the other hand, Huchems Fine Chemical saw its EBIT drop by 9.9% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Huchems Fine Chemical can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Huchems Fine Chemical 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. Over the most recent three years, Huchems Fine Chemical recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Huchems Fine Chemical has ₩266.4b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩69b, being 68% of its EBIT. So is Huchems Fine Chemical's debt a risk? It doesn't seem so to us. 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. Be aware that Huchems Fine Chemical is showing 1 warning sign in our investment analysis , 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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