We Think Huons Global (KOSDAQ:084110) Can Manage Its Debt With Ease

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, Huons Global Co., Ltd. (KOSDAQ:084110) 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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Huons Global

How Much Debt Does Huons Global Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Huons Global had debt of ₩161.4b, up from ₩69.7b in one year. However, it does have ₩177.1b in cash offsetting this, leading to net cash of ₩15.8b.

How Healthy Is Huons Global's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Huons Global had liabilities of ₩238.6b due within 12 months and liabilities of ₩14.5b due beyond that. On the other hand, it had cash of ₩177.1b and ₩116.0b worth of receivables due within a year. So it actually has ₩40.0b more liquid assets than total liabilities.

This short term liquidity is a sign that Huons Global could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Huons Global boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Huons Global grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Huons Global'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, a company can only pay off debt with cold hard cash, not accounting profits. Huons Global 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. Looking at the most recent three years, Huons Global recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case Huons Global has ₩15.8b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 31% over the last year. So we don't think Huons Global's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Huons Global that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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. 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.
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