Howard Marks put it nicely when he said that, rather than worrying about share price volatility, The possibility of permanent loss is the risk I worry about and every practical investor I know worries about. Its only natural to consider a companys balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Huchems Fine Chemical Corporation (KRX:069260) does carry debt. But should shareholders be worried about its use of debt?

Generally speaking, debt only becomes a real problem when a company cant easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of creative destruction where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well and to its own advantage. The first step when considering a companys debt levels is to consider its cash and debt together.

See our latest analysis for Huchems Fine Chemical

The image below, which you can click on for greater detail, shows that at September 2019 Huchems Fine Chemical had debt of 96.6b, up from 93.5k in one year. But on the other hand it also has 353.6b in cash, leading to a 257.0b net cash position.

The latest balance sheet data shows that Huchems Fine Chemical had liabilities of 124.9b due within a year, and liabilities of 76.3b falling due after that. On the other hand, it had cash of 353.6b and 77.2b worth of receivables due within a year. So it actually has 229.7b more liquid assets than total liabilities.

Its good to see that Huchems Fine Chemical has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Huchems Fine Chemical has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Huchems Fine Chemical if management cannot prevent a repeat of the 34% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Huchems Fine Chemicals ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Huchems Fine Chemical 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. During the last three years, Huchems Fine Chemical generated free cash flow amounting to a very robust 81% of its EBIT, more than wed expect. That positions it well to pay down debt if desirable to do so.

While it is always sensible to investigate a companys debt, in this case Huchems Fine Chemical has 257.0b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in 64b. So is Huchems Fine Chemicals debt a risk? It doesnt seem so to us. Given Huchems Fine Chemical has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

If, after all that, youre more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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Does Huchems Fine Chemical (KRX:069260) Have A Healthy Balance Sheet? - Simply Wall St