Is Hyundai Wia (KRX:011210) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Hyundai Wia Corporation (KRX:011210) does use debt in its business. But the real question is whether this debt is making the company risky.

We check all companies for important risks. See what we found for Hyundai Wia in our free report.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Hyundai Wia's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hyundai Wia had ₩1.24t of debt in December 2024, down from ₩1.46t, one year before. However, because it has a cash reserve of ₩1.24t, its net debt is less, at about ₩3.59b.

How Strong Is Hyundai Wia's Balance Sheet?

The latest balance sheet data shows that Hyundai Wia had liabilities of ₩2.40t due within a year, and liabilities of ₩651.2b falling due after that. Offsetting these obligations, it had cash of ₩1.24t as well as receivables valued at ₩1.61t due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩203.9b.

Of course, Hyundai Wia has a market capitalization of ₩1.09t, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Hyundai Wia has a very light debt load indeed.

See our latest analysis for Hyundai Wia

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With debt at a measly 0.0074 times EBITDA and EBIT covering interest a whopping 10.3 times, it's clear that Hyundai Wia is not a desperate borrower. Indeed relative to its earnings its debt load seems light as a feather. On the other hand, Hyundai Wia saw its EBIT drop by 6.0% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hyundai Wia can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Hyundai Wia actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Hyundai Wia's conversion of EBIT to free cash flow suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But truth be told we feel its EBIT growth rate does undermine this impression a bit. Taking all this data into account, it seems to us that Hyundai Wia takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. Over time, share prices tend to follow earnings per share, so if you're interested in Hyundai Wia, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.