Here's Why Hanyang Digitech (KOSDAQ:078350) Can Manage Its Debt Responsibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hanyang Digitech Co., Ltd. (KOSDAQ:078350) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hanyang Digitech

What Is Hanyang Digitech's Debt?

As you can see below, Hanyang Digitech had ₩10.0b of debt at June 2024, down from ₩26.0b a year prior. However, it does have ₩14.1b in cash offsetting this, leading to net cash of ₩4.14b.

How Strong Is Hanyang Digitech's Balance Sheet?

We can see from the most recent balance sheet that Hanyang Digitech had liabilities of ₩99.5b falling due within a year, and liabilities of ₩11.9b due beyond that. Offsetting these obligations, it had cash of ₩14.1b as well as receivables valued at ₩58.7b due within 12 months. So its liabilities total ₩38.5b more than the combination of its cash and short-term receivables.

Since publicly traded Hanyang Digitech shares are worth a total of ₩211.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hanyang Digitech also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that Hanyang Digitech saw its EBIT decline by 6.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hanyang Digitech's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hanyang Digitech 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. Considering the last three years, Hanyang Digitech actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

Although Hanyang Digitech's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩4.14b. So we are not troubled with Hanyang Digitech's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Hanyang Digitech, you may well want to click here to check an interactive graph of its earnings per share history.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.