Does Hankook Tire & Technology (KRX:161390) Have A Healthy Balance Sheet?

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.' 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 Hankook Tire & Technology Co., Ltd. (KRX:161390) does use debt in its business. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hankook Tire & Technology

What Is Hankook Tire & Technology's Debt?

As you can see below, Hankook Tire & Technology had ₩784.9b of debt at March 2024, down from ₩1.20t a year prior. However, it does have ₩2.91t in cash offsetting this, leading to net cash of ₩2.12t.

How Strong Is Hankook Tire & Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hankook Tire & Technology had liabilities of ₩2.63t due within 12 months and liabilities of ₩748.6b due beyond that. Offsetting these obligations, it had cash of ₩2.91t as well as receivables valued at ₩1.98t due within 12 months. So it actually has ₩1.52t more liquid assets than total liabilities.

This surplus suggests that Hankook Tire & Technology is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Hankook Tire & Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Hankook Tire & Technology grew its EBIT by 99% over the last twelve months, and that growth will make it easier to handle its 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 Hankook Tire & Technology'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hankook Tire & Technology 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. During the last three years, Hankook Tire & Technology generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hankook Tire & Technology has ₩2.12t in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩1.5t, being 81% of its EBIT. The bottom line is that we do not find Hankook Tire & Technology's debt levels at all concerning. 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. To that end, you should be aware of the 1 warning sign we've spotted with Hankook Tire & Technology .

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.