These 4 Measures Indicate That Hankook Tire & Technology (KRX:161390) Is Using Debt Safely

Warren Buffett famously said, '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 can see that Hankook Tire & Technology Co., Ltd. (KRX:161390) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hankook Tire & Technology

How Much Debt Does Hankook Tire & Technology Carry?

As you can see below, Hankook Tire & Technology had ₩712.9b of debt at September 2024, down from ₩911.6b a year prior. But on the other hand it also has ₩3.16t in cash, leading to a ₩2.44t net cash position.

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

According to the last reported balance sheet, Hankook Tire & Technology had liabilities of ₩2.68t due within 12 months, and liabilities of ₩785.0b due beyond 12 months. Offsetting this, it had ₩3.16t in cash and ₩2.09t in receivables that were due within 12 months. So it actually has ₩1.78t more liquid assets than total liabilities.

This luscious liquidity implies that Hankook Tire & Technology's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 70% over the last twelve months, and that growth will make it easier to handle its 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hankook Tire & Technology 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 most recent three years, Hankook Tire & Technology recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hankook Tire & Technology has ₩2.44t in net cash and a decent-looking balance sheet. And we liked the look of last year's 70% year-on-year EBIT growth. 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. For instance, we've identified 1 warning sign for Hankook Tire & Technology that you should be aware of.

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.