These 4 Measures Indicate That Hanyang Digitech (KOSDAQ:078350) Is Using Debt Reasonably Well

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. As with many other companies Hanyang Digitech Co., Ltd. (KOSDAQ:078350) makes use of debt. But the real question is whether this debt is making the company risky.

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Hanyang Digitech's Net Debt?

The image below, which you can click on for greater detail, shows that Hanyang Digitech had debt of ₩15.0b at the end of December 2024, a reduction from ₩31.8b over a year. However, it does have ₩18.4b in cash offsetting this, leading to net cash of ₩3.41b.

How Healthy Is Hanyang Digitech's Balance Sheet?

According to the last reported balance sheet, Hanyang Digitech had liabilities of ₩104.9b due within 12 months, and liabilities of ₩12.5b due beyond 12 months. On the other hand, it had cash of ₩18.4b and ₩60.5b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩38.6b.

Hanyang Digitech has a market capitalization of ₩134.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Hanyang Digitech boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Hanyang Digitech

On top of that, Hanyang Digitech grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hanyang Digitech will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hanyang Digitech 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. Considering the last three years, Hanyang Digitech actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While Hanyang Digitech does have more liabilities than liquid assets, it also has net cash of ₩3.41b. And it impressed us with its EBIT growth of 83% over the last year. So we don't have any problem with Hanyang Digitech's use of debt. 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. We've identified 1 warning sign with Hanyang Digitech , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.