HancomWITH (KOSDAQ:054920) Is Making Moderate Use Of Debt

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 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. Importantly, HancomWITH Inc. (KOSDAQ:054920) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for HancomWITH

What Is HancomWITH's Debt?

The image below, which you can click on for greater detail, shows that HancomWITH had debt of ₩46.4b at the end of June 2024, a reduction from ₩53.8b over a year. However, because it has a cash reserve of ₩11.0b, its net debt is less, at about ₩35.4b.

How Strong Is HancomWITH's Balance Sheet?

According to the last reported balance sheet, HancomWITH had liabilities of ₩65.3b due within 12 months, and liabilities of ₩1.47b due beyond 12 months. On the other hand, it had cash of ₩11.0b and ₩12.0b worth of receivables due within a year. So it has liabilities totalling ₩43.8b more than its cash and near-term receivables, combined.

HancomWITH has a market capitalization of ₩76.9b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 HancomWITH 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.

In the last year HancomWITH wasn't profitable at an EBIT level, but managed to grow its revenue by 178%, to ₩468b. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, HancomWITH still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at ₩5.3b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₩2.1b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for HancomWITH (of which 2 don'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.