Does HIMSLtd (KOSDAQ:238490) Have A Healthy Balance Sheet?

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.' 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. Importantly, HIMS Co.,Ltd. (KOSDAQ:238490) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for HIMSLtd

How Much Debt Does HIMSLtd Carry?

As you can see below, HIMSLtd had ₩8.50b of debt at June 2024, down from ₩13.7b a year prior. However, its balance sheet shows it holds ₩11.1b in cash, so it actually has ₩2.62b net cash.

How Healthy Is HIMSLtd's Balance Sheet?

The latest balance sheet data shows that HIMSLtd had liabilities of ₩24.2b due within a year, and liabilities of ₩1.75b falling due after that. Offsetting these obligations, it had cash of ₩11.1b as well as receivables valued at ₩2.04b due within 12 months. So its liabilities total ₩12.8b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since HIMSLtd has a market capitalization of ₩44.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, HIMSLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, HIMSLtd turned things around in the last 12 months, delivering and EBIT of ₩4.8b. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HIMSLtd 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. While HIMSLtd 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. During the last year, HIMSLtd produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While HIMSLtd does have more liabilities than liquid assets, it also has net cash of ₩2.62b. So we don't have any problem with HIMSLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for HIMSLtd (of which 1 doesn't sit too well with us!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.