HIMS (KOSDAQ:238490) Seems To Use Debt Rather Sparingly

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.' 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. Importantly, HIMS Co., Ltd. (KOSDAQ:238490) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for HIMS

How Much Debt Does HIMS Carry?

The chart below, which you can click on for greater detail, shows that HIMS had ₩4.10b in debt in June 2020; about the same as the year before. However, it does have ₩36.4b in cash offsetting this, leading to net cash of ₩32.3b.

How Strong Is HIMS's Balance Sheet?

The latest balance sheet data shows that HIMS had liabilities of ₩23.6b due within a year, and liabilities of ₩4.71b falling due after that. On the other hand, it had cash of ₩36.4b and ₩10.2b worth of receivables due within a year. So it can boast ₩18.3b more liquid assets than total liabilities.

This surplus suggests that HIMS has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, HIMS boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, HIMS grew its EBIT by 370% 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 it is HIMS's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. HIMS 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 most recent three years, HIMS recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that HIMS has net cash of ₩32.3b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 370% over the last year. So is HIMS's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in HIMS, you may well want to click here to check an interactive graph of its earnings per share history.

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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