These 4 Measures Indicate That Hwashin Precision Engineering (KOSDAQ:126640) 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. We can see that Hwashin Precision Engineering Co., Ltd. (KOSDAQ:126640) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hwashin Precision Engineering

What Is Hwashin Precision Engineering's Net Debt?

The chart below, which you can click on for greater detail, shows that Hwashin Precision Engineering had ₩15.0b in debt in June 2024; about the same as the year before. However, it does have ₩36.7b in cash offsetting this, leading to net cash of ₩21.7b.

How Healthy Is Hwashin Precision Engineering's Balance Sheet?

The latest balance sheet data shows that Hwashin Precision Engineering had liabilities of ₩62.0b due within a year, and liabilities of ₩5.52b falling due after that. On the other hand, it had cash of ₩36.7b and ₩32.5b worth of receivables due within a year. So it can boast ₩1.73b more liquid assets than total liabilities.

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

On the other hand, Hwashin Precision Engineering's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hwashin Precision Engineering's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Hwashin Precision Engineering 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 most recent three years, Hwashin Precision Engineering recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hwashin Precision Engineering has ₩21.7b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 75% of that EBIT to free cash flow, bringing in ₩9.3b. So we don't have any problem with Hwashin Precision Engineering'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. For example - Hwashin Precision Engineering has 1 warning sign we think you should be aware of.

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.