Is Hankook Tire & Technology (KRX:161390) Using Too Much 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.' 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. Importantly, Hankook Tire & Technology Co., Ltd. (KRX:161390) does carry debt. 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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hankook Tire & Technology

What Is Hankook Tire & Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that Hankook Tire & Technology had ₩1.37t in debt in December 2020; about the same as the year before. But on the other hand it also has ₩1.71t in cash, leading to a ₩340.7b net cash position.

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

The latest balance sheet data shows that Hankook Tire & Technology had liabilities of ₩1.78t due within a year, and liabilities of ₩1.47t falling due after that. Offsetting these obligations, it had cash of ₩1.71t as well as receivables valued at ₩1.32t due within 12 months. So its liabilities total ₩215.5b more than the combination of its cash and short-term receivables.

Of course, Hankook Tire & Technology has a market capitalization of ₩5.59t, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Hankook Tire & Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Hankook Tire & Technology grew its EBIT at 16% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 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. Over the last three years, Hankook Tire & Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

We could understand if investors are concerned about Hankook Tire & Technology's liabilities, but we can be reassured by the fact it has has net cash of ₩340.7b. And it impressed us with free cash flow of ₩972b, being 120% of its EBIT. So we don't think Hankook Tire & Technology'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 example - Hankook Tire & Technology has 1 warning sign we think 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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