These 4 Measures Indicate That Hyundai Home Shopping Network (KRX:057050) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hyundai Home Shopping Network Corporation (KRX:057050) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hyundai Home Shopping Network

What Is Hyundai Home Shopping Network's Net Debt?

The image below, which you can click on for greater detail, shows that Hyundai Home Shopping Network had debt of ₩305.1b at the end of September 2020, a reduction from ₩325.5b over a year. However, its balance sheet shows it holds ₩644.8b in cash, so it actually has ₩339.8b net cash.

How Healthy Is Hyundai Home Shopping Network's Balance Sheet?

We can see from the most recent balance sheet that Hyundai Home Shopping Network had liabilities of ₩706.7b falling due within a year, and liabilities of ₩168.5b due beyond that. Offsetting this, it had ₩644.8b in cash and ₩256.5b in receivables that were due within 12 months. So it actually has ₩26.1b more liquid assets than total liabilities.

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

And we also note warmly that Hyundai Home Shopping Network grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hyundai Home Shopping Network can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hyundai Home Shopping Network 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, Hyundai Home Shopping Network's free cash flow amounted to 32% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Hyundai Home Shopping Network has net cash of ₩339.8b, as well as more liquid assets than liabilities. And it also grew its EBIT by 13% over the last year. So we are not troubled with Hyundai Home Shopping Network's debt use. 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. For example, we've discovered 2 warning signs for Hyundai Home Shopping Network that you should be aware of before investing here.

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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