Does HB TechnologyLTD (KOSDAQ:078150) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that HB Technology CO.,LTD. (KOSDAQ:078150) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for HB TechnologyLTD

How Much Debt Does HB TechnologyLTD Carry?

You can click the graphic below for the historical numbers, but it shows that HB TechnologyLTD had ₩36.0b of debt in September 2020, down from ₩38.0b, one year before. But on the other hand it also has ₩74.0b in cash, leading to a ₩37.9b net cash position.

A Look At HB TechnologyLTD's Liabilities

Zooming in on the latest balance sheet data, we can see that HB TechnologyLTD had liabilities of ₩56.9b due within 12 months and liabilities of ₩22.0b due beyond that. Offsetting this, it had ₩74.0b in cash and ₩27.0b in receivables that were due within 12 months. So it actually has ₩22.0b more liquid assets than total liabilities.

This short term liquidity is a sign that HB TechnologyLTD could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that HB TechnologyLTD has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, HB TechnologyLTD grew its EBIT by 235% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if HB TechnologyLTD 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. HB TechnologyLTD 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, HB TechnologyLTD 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 it is always sensible to investigate a company's debt, in this case HB TechnologyLTD has ₩37.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 235% year-on-year EBIT growth. So we are not troubled with HB TechnologyLTD'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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for HB TechnologyLTD you should know about.

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. 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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