Hy-Lok Corporation Ltd (KOSDAQ:013030) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hy-Lok Corporation ,Ltd. (KOSDAQ:013030) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hy-Lok Corporation Ltd

What Is Hy-Lok Corporation Ltd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Hy-Lok Corporation Ltd had ₩4.95b of debt, an increase on ₩2.00b, over one year. However, its balance sheet shows it holds ₩162.3b in cash, so it actually has ₩157.4b net cash.

How Strong Is Hy-Lok Corporation Ltd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hy-Lok Corporation Ltd had liabilities of ₩21.1b due within 12 months and liabilities of ₩14.5b due beyond that. Offsetting these obligations, it had cash of ₩162.3b as well as receivables valued at ₩43.4b due within 12 months. So it actually has ₩170.0b more liquid assets than total liabilities.

This excess liquidity is a great indication that Hy-Lok Corporation Ltd's balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Hy-Lok Corporation Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Hy-Lok Corporation Ltd grew its EBIT by 18% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hy-Lok Corporation Ltd can strengthen its balance sheet over time. 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. Hy-Lok Corporation Ltd 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. Happily for any shareholders, Hy-Lok Corporation Ltd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Hy-Lok Corporation Ltd has net cash of ₩157.4b, as well as more liquid assets than liabilities. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in ₩17b. At the end of the day we're not concerned about Hy-Lok Corporation Ltd's debt. 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, we've discovered 2 warning signs for Hy-Lok Corporation Ltd (1 is a bit unpleasant!) that you should be aware of before investing here.

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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