HB TechnologyLTD (KOSDAQ:078150) Seems To Use Debt Quite Sensibly

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. We note that HB Technology CO.,LTD. (KOSDAQ:078150) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its 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. However, its balance sheet shows it holds ₩74.0b in cash, so it actually has ₩37.9b net cash.

How Strong Is HB TechnologyLTD's Balance Sheet?

According to the last reported balance sheet, HB TechnologyLTD had liabilities of ₩56.9b due within 12 months, and liabilities of ₩22.0b due beyond 12 months. Offsetting this, it had ₩74.0b in cash and ₩27.0b in receivables that were due within 12 months. So it can boast ₩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.

Even more impressive was the fact that HB TechnologyLTD grew its EBIT by 235% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine HB TechnologyLTD'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, a company can only pay off debt with cold hard cash, not accounting profits. While HB TechnologyLTD has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, HB TechnologyLTD saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that HB TechnologyLTD has net cash of ₩37.9b, as well as more liquid assets than liabilities. And we liked the look of last year's 235% year-on-year EBIT growth. So we don't have any problem with HB TechnologyLTD's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - HB TechnologyLTD has 1 warning sign we think 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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