Hyundai MobisLtd (KRX:012330) Could Easily Take On More Debt

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.' 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. As with many other companies Hyundai Mobis Co.,Ltd (KRX:012330) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hyundai MobisLtd

What Is Hyundai MobisLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hyundai MobisLtd had ₩2.44t of debt in March 2024, down from ₩3.38t, one year before. However, it does have ₩10t in cash offsetting this, leading to net cash of ₩7.57t.

How Healthy Is Hyundai MobisLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hyundai MobisLtd had liabilities of ₩13t due within 12 months and liabilities of ₩6.45t due beyond that. Offsetting this, it had ₩10t in cash and ₩10t in receivables that were due within 12 months. So it actually has ₩766.4b more liquid assets than total liabilities.

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

And we also note warmly that Hyundai MobisLtd grew its EBIT by 18% last year, making its debt load easier to handle. 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 MobisLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hyundai MobisLtd 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. Happily for any shareholders, Hyundai MobisLtd 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.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hyundai MobisLtd has ₩7.57t in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩3.2t, being 105% of its EBIT. So we don't think Hyundai MobisLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Hyundai MobisLtd you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com