We Think Hankook Tire & Technology (KRX:161390) Can Manage Its Debt With Ease

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.' 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. We can see that Hankook Tire & Technology Co., Ltd. (KRX:161390) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hankook Tire & Technology

What Is Hankook Tire & Technology's Debt?

As you can see below, at the end of June 2024, Hankook Tire & Technology had ₩1.20t of debt, up from ₩900.9b a year ago. Click the image for more detail. But it also has ₩2.97t in cash to offset that, meaning it has ₩1.77t net cash.

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 ₩2.52t due within 12 months and liabilities of ₩804.6b due beyond that. Offsetting these obligations, it had cash of ₩2.97t as well as receivables valued at ₩1.94t due within 12 months. So it actually has ₩1.58t more liquid assets than total liabilities.

This surplus strongly suggests that Hankook Tire & Technology has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hankook Tire & Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Hankook Tire & Technology grew its EBIT by 103% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Hankook Tire & Technology has ₩1.77t in net cash and a decent-looking balance sheet. And we liked the look of last year's 103% year-on-year EBIT growth. When it comes to Hankook Tire & Technology's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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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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.