HANMI Semiconductor (KRX:042700) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 HANMI Semiconductor Co., Ltd. (KRX:042700) makes use of debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does HANMI Semiconductor Carry?

The image below, which you can click on for greater detail, shows that at June 2025 HANMI Semiconductor had debt of ₩25.0b, up from none in one year. However, it does have ₩37.8b in cash offsetting this, leading to net cash of ₩12.8b.

A Look At HANMI Semiconductor's Liabilities

We can see from the most recent balance sheet that HANMI Semiconductor had liabilities of ₩152.7b falling due within a year, and liabilities of ₩4.63b due beyond that. Offsetting these obligations, it had cash of ₩37.8b as well as receivables valued at ₩211.0b due within 12 months. So it can boast ₩91.5b more liquid assets than total liabilities.

Having regard to HANMI Semiconductor's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩12t company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, HANMI Semiconductor boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for HANMI Semiconductor

Even more impressive was the fact that HANMI Semiconductor grew its EBIT by 210% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if HANMI Semiconductor can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While HANMI Semiconductor 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. In the last three years, HANMI Semiconductor's free cash flow amounted to 32% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that HANMI Semiconductor has net cash of ₩12.8b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 210% over the last year. So we don't think HANMI Semiconductor's use of debt is risky. 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. For example HANMI Semiconductor has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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.

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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.