Here's Why HD Korea Shipbuilding & Offshore Engineering (KRX:009540) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that HD Korea Shipbuilding & Offshore Engineering Co., Ltd. (KRX:009540) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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

Check out 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 ₩1.68t at the end of September 2024, a reduction from ₩3.98t over a year. However, its balance sheet shows it holds ₩4.31t in cash, so it actually has ₩2.63t net cash.

How Healthy Is HD Korea Shipbuilding & Offshore Engineering's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HD Korea Shipbuilding & Offshore Engineering had liabilities of ₩17t due within 12 months and liabilities of ₩1.62t due beyond that. On the other hand, it had cash of ₩4.31t and ₩1.55t worth of receivables due within a year. So it has liabilities totalling ₩13t more than its cash and near-term receivables, combined.

This deficit is considerable relative to its very significant market capitalization of ₩17t, so it does suggest shareholders should keep an eye on HD Korea Shipbuilding & Offshore Engineering's use of debt. 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, 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 349% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine HD Korea Shipbuilding & Offshore Engineering's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. HD Korea Shipbuilding & Offshore Engineering 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. Happily for any shareholders, HD Korea Shipbuilding & Offshore Engineering actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While HD Korea Shipbuilding & Offshore Engineering does have more liabilities than liquid assets, it also has net cash of ₩2.63t. And it impressed us with free cash flow of ₩1.3t, being 205% 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.

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. 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.