Hankook Tire & Technology (KRX:161390) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Hankook Tire & Technology Co., Ltd. (KRX:161390) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hankook Tire & Technology

What Is Hankook Tire & Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hankook Tire & Technology had ₩911.6b of debt in September 2023, down from ₩1.77t, one year before. But on the other hand it also has ₩2.37t in cash, leading to a ₩1.46t net cash position.

A Look At Hankook Tire & Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Hankook Tire & Technology had liabilities of ₩2.32t due within 12 months and liabilities of ₩941.7b due beyond that. Offsetting these obligations, it had cash of ₩2.37t as well as receivables valued at ₩2.03t due within 12 months. So it actually has ₩1.14t more liquid assets than total liabilities.

This excess liquidity suggests that Hankook Tire & Technology is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any 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 80% 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 90% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hankook Tire & Technology has net cash of ₩1.46t, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩1.2t, being 90% of its EBIT. The bottom line is that we do not find Hankook Tire & Technology's debt levels at all concerning. 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. Be aware that Hankook Tire & Technology is showing 2 warning signs in our investment analysis , 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.