Does HIGEN Motor (KOSDAQ:160190) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, HIGEN Motor Co., Ltd. (KOSDAQ:160190) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for HIGEN Motor

What Is HIGEN Motor's Net Debt?

The image below, which you can click on for greater detail, shows that HIGEN Motor had debt of ₩29.3b at the end of September 2024, a reduction from ₩40.0b over a year. However, its balance sheet shows it holds ₩36.0b in cash, so it actually has ₩6.71b net cash.

How Strong Is HIGEN Motor's Balance Sheet?

The latest balance sheet data shows that HIGEN Motor had liabilities of ₩35.5b due within a year, and liabilities of ₩14.9b falling due after that. On the other hand, it had cash of ₩36.0b and ₩10.4b worth of receivables due within a year. So it has liabilities totalling ₩4.02b more than its cash and near-term receivables, combined.

This state of affairs indicates that HIGEN Motor's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩297.3b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, HIGEN Motor also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that HIGEN Motor's EBIT was down 77% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since HIGEN Motor will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While HIGEN Motor 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, HIGEN Motor 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 HIGEN Motor's liabilities, but we can be reassured by the fact it has has net cash of ₩6.71b. And it impressed us with free cash flow of ₩156m, being 102% of its EBIT. So we don't have any problem with HIGEN Motor's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that HIGEN Motor is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...

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.