We Think Hancom MDS (KOSDAQ:086960) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Hancom MDS Inc. (KOSDAQ:086960) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, 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 Hancom MDS

How Much Debt Does Hancom MDS Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Hancom MDS had ₩11.3b of debt, an increase on ₩1.38b, over one year. However, it does have ₩94.6b in cash offsetting this, leading to net cash of ₩83.3b.

How Strong Is Hancom MDS' Balance Sheet?

The latest balance sheet data shows that Hancom MDS had liabilities of ₩34.4b due within a year, and liabilities of ₩22.1b falling due after that. Offsetting this, it had ₩94.6b in cash and ₩21.6b in receivables that were due within 12 months. So it actually has ₩59.6b more liquid assets than total liabilities.

This surplus strongly suggests that Hancom MDS has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Hancom MDS boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Hancom MDS grew its EBIT by 13% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hancom MDS'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. Hancom MDS 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, Hancom MDS 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

While it is always sensible to investigate a company's debt, in this case Hancom MDS has ₩83.3b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩4.1b, being 115% of its EBIT. When it comes to Hancom MDS's debt, we sufficiently relaxed that our mind turns to the jacuzzi. Over time, share prices tend to follow earnings per share, so if you're interested in Hancom MDS, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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.
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