These 4 Measures Indicate That Hanil Networks (KOSDAQ:046110) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Hanil Networks Co., Ltd. (KOSDAQ:046110) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hanil Networks

How Much Debt Does Hanil Networks Carry?

The chart below, which you can click on for greater detail, shows that Hanil Networks had ₩10.0b in debt in December 2020; about the same as the year before. However, it does have ₩20.3b in cash offsetting this, leading to net cash of ₩10.3b.

A Look At Hanil Networks' Liabilities

The latest balance sheet data shows that Hanil Networks had liabilities of ₩37.2b due within a year, and liabilities of ₩22.0b falling due after that. On the other hand, it had cash of ₩20.3b and ₩17.6b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩21.3b.

While this might seem like a lot, it is not so bad since Hanil Networks has a market capitalization of ₩66.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Hanil Networks also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Hanil Networks grew its EBIT at 14% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hanil Networks's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hanil Networks 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 last three years, Hanil Networks actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

Although Hanil Networks's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩10.3b. And it impressed us with free cash flow of ₩30b, being 197% of its EBIT. So we don't think Hanil Networks's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Hanil Networks has 1 warning sign we think you should be aware of.

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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