We Think HB SOLUTION (KOSDAQ:297890) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies HB SOLUTION Co., Ltd. (KOSDAQ:297890) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 HB SOLUTION

What Is HB SOLUTION's Debt?

You can click the graphic below for the historical numbers, but it shows that HB SOLUTION had ₩26.0b of debt in December 2023, down from ₩37.6b, one year before. However, it does have ₩74.4b in cash offsetting this, leading to net cash of ₩48.4b.

A Look At HB SOLUTION's Liabilities

We can see from the most recent balance sheet that HB SOLUTION had liabilities of ₩51.2b falling due within a year, and liabilities of ₩17.0b due beyond that. On the other hand, it had cash of ₩74.4b and ₩11.2b worth of receivables due within a year. So it can boast ₩17.3b more liquid assets than total liabilities.

This short term liquidity is a sign that HB SOLUTION could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, HB SOLUTION boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that HB SOLUTION's load is not too heavy, because its EBIT was down 75% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since HB SOLUTION will need earnings to service that debt. 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, a company can only pay off debt with cold hard cash, not accounting profits. HB SOLUTION 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, HB SOLUTION recorded free cash flow worth 78% 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 HB SOLUTION has net cash of ₩48.4b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩12b, being 78% of its EBIT. So we don't have any problem with HB SOLUTION's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that HB SOLUTION is showing 3 warning signs in our investment analysis , and 1 of those is significant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.