Does HD Korea Shipbuilding & Offshore Engineering (KRX:009540) 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 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. Importantly, HD Korea Shipbuilding & Offshore Engineering Co., Ltd. (KRX:009540) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 HD Korea Shipbuilding & Offshore Engineering

What Is HD Korea Shipbuilding & Offshore Engineering's Debt?

The image below, which you can click on for greater detail, shows that HD Korea Shipbuilding & Offshore Engineering had debt of ₩2.32t at the end of June 2024, a reduction from ₩4.11t over a year. But on the other hand it also has ₩5.16t in cash, leading to a ₩2.83t net cash position.

A Look At HD Korea Shipbuilding & Offshore Engineering's Liabilities

According to the last reported balance sheet, HD Korea Shipbuilding & Offshore Engineering had liabilities of ₩17t due within 12 months, and liabilities of ₩2.52t due beyond 12 months. On the other hand, it had cash of ₩5.16t and ₩1.45t worth of receivables due within a year. So its liabilities total ₩13t more than the combination of its cash and short-term receivables.

This is a mountain of leverage even relative to its gargantuan market capitalization of ₩14t. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, HD Korea Shipbuilding & Offshore Engineering also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, HD Korea Shipbuilding & Offshore Engineering grew its EBIT by 112% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if HD Korea Shipbuilding & Offshore Engineering 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While HD Korea Shipbuilding & Offshore Engineering 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 two years, HD Korea Shipbuilding & Offshore Engineering actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although HD Korea Shipbuilding & Offshore Engineering's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩2.83t. And it impressed us with free cash flow of ₩2.1t, being 251% of its EBIT. So is HD Korea Shipbuilding & Offshore Engineering's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of HD Korea Shipbuilding & Offshore Engineering's earnings per share history for free.

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.