Here's Why Yuhan (KRX:000100) Can Manage Its Debt Responsibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Yuhan Corporation (KRX:000100) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Yuhan

How Much Debt Does Yuhan Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Yuhan had debt of ₩226.0b, up from ₩93.4b in one year. But on the other hand it also has ₩322.0b in cash, leading to a ₩96.0b net cash position.

How Healthy Is Yuhan's Balance Sheet?

According to the last reported balance sheet, Yuhan had liabilities of ₩583.2b due within 12 months, and liabilities of ₩129.1b due beyond 12 months. Offsetting these obligations, it had cash of ₩322.0b as well as receivables valued at ₩574.5b due within 12 months. So it can boast ₩184.2b more liquid assets than total liabilities.

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

On top of that, Yuhan grew its EBIT by 57% 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 future earnings, more than anything, that will determine Yuhan's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, Yuhan saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yuhan has net cash of ₩96.0b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 57% over the last year. So we are not troubled with Yuhan's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Yuhan's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.