These 4 Measures Indicate That Hwasung Industrial (KRX:002460) Is Using Debt Safely

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. Importantly, Hwasung Industrial Co., Ltd. (KRX:002460) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hwasung Industrial

How Much Debt Does Hwasung Industrial Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Hwasung Industrial had debt of ₩57.1b, up from ₩7.59b in one year. But it also has ₩293.3b in cash to offset that, meaning it has ₩236.2b net cash.

How Healthy Is Hwasung Industrial's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hwasung Industrial had liabilities of ₩136.4b due within 12 months and liabilities of ₩49.6b due beyond that. Offsetting this, it had ₩293.3b in cash and ₩51.5b in receivables that were due within 12 months. So it actually has ₩158.8b more liquid assets than total liabilities.

This surplus liquidity suggests that Hwasung Industrial's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Hwasung Industrial boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Hwasung Industrial grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. 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 Hwasung Industrial 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Hwasung Industrial 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, Hwasung Industrial actually produced more free cash flow than EBIT. 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 it is always sensible to investigate a company's debt, in this case Hwasung Industrial has ₩236.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩100b, being 188% of its EBIT. At the end of the day we're not concerned about Hwasung Industrial's debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Hwasung Industrial (1 can't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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