Does Hyundai Engineering & ConstructionLtd (KRX:000720) Have A Healthy Balance Sheet?

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.' 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 Hyundai Engineering & Construction Co.,Ltd. (KRX:000720) does use debt in its business. 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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Hyundai Engineering & ConstructionLtd

What Is Hyundai Engineering & ConstructionLtd's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Hyundai Engineering & ConstructionLtd had debt of ₩2.62t, up from ₩2.18t in one year. But on the other hand it also has ₩3.39t in cash, leading to a ₩770.8b net cash position.

How Healthy Is Hyundai Engineering & ConstructionLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hyundai Engineering & ConstructionLtd had liabilities of ₩11t due within 12 months and liabilities of ₩2.98t due beyond that. Offsetting this, it had ₩3.39t in cash and ₩12t in receivables that were due within 12 months. So it can boast ₩1.19t more liquid assets than total liabilities.

This surplus strongly suggests that Hyundai Engineering & ConstructionLtd has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Hyundai Engineering & ConstructionLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Hyundai Engineering & ConstructionLtd grew its EBIT by 39% 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 Hyundai Engineering & ConstructionLtd'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Hyundai Engineering & ConstructionLtd 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, Hyundai Engineering & ConstructionLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Hyundai Engineering & ConstructionLtd has net cash of ₩770.8b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 39% over the last year. So we don't think Hyundai Engineering & ConstructionLtd's use of debt is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Hyundai Engineering & ConstructionLtd (including 1 which is significant) .

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.