Does MP Hankang (KOSDAQ:219550) Have A Healthy Balance Sheet?

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.' 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. As with many other companies MP Hankang CO., Ltd. (KOSDAQ:219550) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for MP Hankang

What Is MP Hankang's Debt?

The image below, which you can click on for greater detail, shows that MP Hankang had debt of ₩5.22b at the end of September 2020, a reduction from ₩7.81b over a year. However, its balance sheet shows it holds ₩7.51b in cash, so it actually has ₩2.29b net cash.

How Healthy Is MP Hankang's Balance Sheet?

According to the last reported balance sheet, MP Hankang had liabilities of ₩7.15b due within 12 months, and liabilities of ₩774.5m due beyond 12 months. Offsetting these obligations, it had cash of ₩7.51b as well as receivables valued at ₩4.66b due within 12 months. So it can boast ₩4.25b more liquid assets than total liabilities.

This surplus suggests that MP Hankang has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that MP Hankang has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is MP Hankang's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, MP Hankang made a loss at the EBIT level, and saw its revenue drop to ₩34b, which is a fall of 32%. To be frank that doesn't bode well.

So How Risky Is MP Hankang?

Although MP Hankang had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of ₩2.9b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for MP Hankang (1 is concerning) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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