Does Yuhan (KRX:000100) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Yuhan Corporation (KRX:000100) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Yuhan

How Much Debt Does Yuhan Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Yuhan had ₩101.0b of debt, an increase on ₩95.2b, over one year. However, it does have ₩496.3b in cash offsetting this, leading to net cash of ₩395.3b.

How Healthy Is Yuhan's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yuhan had liabilities of ₩372.0b due within 12 months and liabilities of ₩165.8b due beyond that. Offsetting these obligations, it had cash of ₩496.3b as well as receivables valued at ₩438.9b due within 12 months. So it can boast ₩397.4b more liquid assets than total liabilities.

This surplus suggests that Yuhan has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Yuhan has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Yuhan grew its EBIT by 459% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Yuhan can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Yuhan 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, Yuhan recorded free cash flow of 49% 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 Yuhan has ₩395.3b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 459% over the last year. So we don't think Yuhan's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Yuhan (including 1 which makes us a bit uncomfortable) .

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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