Heungkuk MetaltechLtd (KOSDAQ:010240) Seems To Use Debt Rather Sparingly

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. We can see that Heungkuk Metaltech Co.,Ltd. (KOSDAQ:010240) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Heungkuk MetaltechLtd

How Much Debt Does Heungkuk MetaltechLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Heungkuk MetaltechLtd had debt of ₩14.2b, up from ₩8.00b in one year. However, its balance sheet shows it holds ₩23.8b in cash, so it actually has ₩9.55b net cash.

How Healthy Is Heungkuk MetaltechLtd's Balance Sheet?

We can see from the most recent balance sheet that Heungkuk MetaltechLtd had liabilities of ₩22.5b falling due within a year, and liabilities of ₩10.4b due beyond that. Offsetting these obligations, it had cash of ₩23.8b as well as receivables valued at ₩19.2b due within 12 months. So it can boast ₩10.2b more liquid assets than total liabilities.

This surplus suggests that Heungkuk MetaltechLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Heungkuk MetaltechLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, Heungkuk MetaltechLtd grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Heungkuk MetaltechLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Heungkuk MetaltechLtd 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, Heungkuk MetaltechLtd produced sturdy free cash flow equating to 57% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Heungkuk MetaltechLtd has net cash of ₩9.55b, as well as more liquid assets than liabilities. And we liked the look of last year's 29% year-on-year EBIT growth. So we don't think Heungkuk MetaltechLtd'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. Case in point: We've spotted 2 warning signs for Heungkuk MetaltechLtd 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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