Is Hyundai MobisLtd (KRX:012330) Using Too Much 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.' 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. Importantly, Hyundai Mobis Co.,Ltd (KRX:012330) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

See our latest analysis for Hyundai MobisLtd

What Is Hyundai MobisLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Hyundai MobisLtd had debt of ₩2.45t at the end of September 2023, a reduction from ₩3.89t over a year. However, it does have ₩9.64t in cash offsetting this, leading to net cash of ₩7.19t.

How Strong Is Hyundai MobisLtd's Balance Sheet?

We can see from the most recent balance sheet that Hyundai MobisLtd had liabilities of ₩12t falling due within a year, and liabilities of ₩6.17t due beyond that. Offsetting this, it had ₩9.64t in cash and ₩10t in receivables that were due within 12 months. So it can boast ₩1.66t more liquid assets than total liabilities.

This short term liquidity is a sign that Hyundai MobisLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hyundai MobisLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Hyundai MobisLtd has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. 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 Hyundai MobisLtd'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. 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. Over the last three years, Hyundai MobisLtd recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hyundai MobisLtd has net cash of ₩7.19t, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩3.5t, being 90% of its EBIT. So we don't think Hyundai MobisLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Hyundai MobisLtd that you should be aware of.

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.