Hyundai G.F. Holdings (KRX:005440) Seems To Use Debt Quite Sensibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Hyundai G.F. Holdings Co., Ltd. (KRX:005440) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Hyundai G.F. Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Hyundai G.F. Holdings had ₩686.7b of debt, an increase on ₩443.5b, over one year. However, its balance sheet shows it holds ₩1.19t in cash, so it actually has ₩498.4b net cash.

How Healthy Is Hyundai G.F. Holdings' Balance Sheet?

We can see from the most recent balance sheet that Hyundai G.F. Holdings had liabilities of ₩2.06t falling due within a year, and liabilities of ₩1.16t due beyond that. Offsetting this, it had ₩1.19t in cash and ₩1.09t in receivables that were due within 12 months. So its liabilities total ₩938.8b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩1.23t. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Hyundai G.F. Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Hyundai G.F. Holdings

Better yet, Hyundai G.F. Holdings grew its EBIT by 703% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hyundai G.F. Holdings'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. Hyundai G.F. Holdings 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. Over the last two years, Hyundai G.F. Holdings recorded free cash flow worth a fulsome 91% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Hyundai G.F. Holdings does have more liabilities than liquid assets, it also has net cash of ₩498.4b. And it impressed us with free cash flow of ₩203b, being 91% of its EBIT. So we don't think Hyundai G.F. Holdings's use of debt is risky. 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. We've identified 3 warning signs with Hyundai G.F. Holdings (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.