We Think Hankook Technology Group (KRX:000240) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Hankook Technology Group Co., Ltd. (KRX:000240) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Hankook Technology Group

What Is Hankook Technology Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Hankook Technology Group had ₩78.9b of debt in September 2020, down from ₩87.5b, one year before. However, its balance sheet shows it holds ₩321.6b in cash, so it actually has ₩242.7b net cash.

A Look At Hankook Technology Group's Liabilities

The latest balance sheet data shows that Hankook Technology Group had liabilities of ₩190.7b due within a year, and liabilities of ₩119.8b falling due after that. Offsetting these obligations, it had cash of ₩321.6b as well as receivables valued at ₩146.4b due within 12 months. So it actually has ₩157.4b more liquid assets than total liabilities.

This surplus suggests that Hankook Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hankook Technology Group has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Hankook Technology Group's saving grace is its low debt levels, because its EBIT has tanked 37% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Hankook Technology Group's 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hankook Technology Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Hankook Technology Group recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Hankook Technology Group has net cash of ₩242.7b, as well as more liquid assets than liabilities. So we don't have any problem with Hankook Technology Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Hankook Technology Group .

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. 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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