Here's Why HAESUNG DS (KRX:195870) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that HAESUNG DS Co., Ltd. (KRX:195870) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for HAESUNG DS

What Is HAESUNG DS's Debt?

The chart below, which you can click on for greater detail, shows that HAESUNG DS had ₩87.4b in debt in September 2024; about the same as the year before. But on the other hand it also has ₩87.7b in cash, leading to a ₩377.8m net cash position.

A Look At HAESUNG DS' Liabilities

According to the last reported balance sheet, HAESUNG DS had liabilities of ₩127.6b due within 12 months, and liabilities of ₩46.1b due beyond 12 months. Offsetting these obligations, it had cash of ₩87.7b as well as receivables valued at ₩114.0b due within 12 months. So it actually has ₩28.1b more liquid assets than total liabilities.

This short term liquidity is a sign that HAESUNG DS could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that HAESUNG DS has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact HAESUNG DS's saving grace is its low debt levels, because its EBIT has tanked 49% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine HAESUNG DS's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. HAESUNG DS 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. In the last three years, HAESUNG DS'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 HAESUNG DS has net cash of ₩377.8m, as well as more liquid assets than liabilities. So we don't have any problem with HAESUNG DS'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. To that end, you should learn about the 2 warning signs we've spotted with HAESUNG DS (including 1 which is a bit unpleasant) .

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.