We Think Hwashin Precision Engineering (KOSDAQ:126640) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Hwashin Precision Engineering Co., Ltd. (KOSDAQ:126640) makes use of debt. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Hwashin Precision Engineering's Debt?

As you can see below, Hwashin Precision Engineering had ₩15.0b of debt, at December 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₩27.7b in cash, leading to a ₩12.7b net cash position.

How Healthy Is Hwashin Precision Engineering's Balance Sheet?

The latest balance sheet data shows that Hwashin Precision Engineering had liabilities of ₩61.1b due within a year, and liabilities of ₩1.74b falling due after that. Offsetting these obligations, it had cash of ₩27.7b as well as receivables valued at ₩35.6b due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Hwashin Precision Engineering's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₩57.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Hwashin Precision Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Hwashin Precision Engineering

It is just as well that Hwashin Precision Engineering's load is not too heavy, because its EBIT was down 85% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Hwashin Precision Engineering will need earnings to service that debt. 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 .

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 50% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hwashin Precision Engineering has net cash of ₩12.7b, as well as more liquid assets than liabilities. So we are not troubled with Hwashin Precision Engineering's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Hwashin Precision Engineering , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.