Yuhan (KRX:000100) Has A Pretty Healthy Balance Sheet

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.' 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, Yuhan Corporation (KRX:000100) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, 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 2020 Yuhan had debt of ₩115.8b, up from ₩83.3b in one year. However, it does have ₩445.6b in cash offsetting this, leading to net cash of ₩329.8b.

A Look At Yuhan's Liabilities

We can see from the most recent balance sheet that Yuhan had liabilities of ₩382.2b falling due within a year, and liabilities of ₩164.8b due beyond that. Offsetting these obligations, it had cash of ₩445.6b as well as receivables valued at ₩464.4b due within 12 months. So it actually has ₩363.0b 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. Succinctly put, Yuhan boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Yuhan grew its EBIT by 575% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 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. In the last three years, Yuhan created free cash flow amounting to 6.2% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Yuhan has ₩329.8b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 575% over the last year. So is Yuhan's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Yuhan (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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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