We Think HD Korea Shipbuilding & Offshore Engineering (KRX:009540) Is Taking Some Risk With Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 HD Korea Shipbuilding & Offshore Engineering Co., Ltd. (KRX:009540) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 ₩3.98t at the end of September 2023, a reduction from ₩5.36t over a year. But on the other hand it also has ₩5.09t in cash, leading to a ₩1.11t net cash position.

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

We can see from the most recent balance sheet that HD Korea Shipbuilding & Offshore Engineering had liabilities of ₩18t falling due within a year, and liabilities of ₩2.86t due beyond that. Offsetting these obligations, it had cash of ₩5.09t as well as receivables valued at ₩1.31t due within 12 months. So its liabilities total ₩14t more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the ₩8.15t company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, HD Korea Shipbuilding & Offshore Engineering would likely require a major re-capitalisation if it had to pay its creditors today. HD Korea Shipbuilding & Offshore Engineering boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

It was also good to see that despite losing money on the EBIT line last year, HD Korea Shipbuilding & Offshore Engineering turned things around in the last 12 months, delivering and EBIT of ₩242b. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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 ₩1.11t. The cherry on top was that in converted 593% of that EBIT to free cash flow, bringing in ₩1.4t. So while HD Korea Shipbuilding & Offshore Engineering does not have a great balance sheet, it's certainly not too bad. Over time, share prices tend to follow earnings per share, so if you're interested in HD Korea Shipbuilding & Offshore Engineering, you may well want to click here to check an interactive graph of its earnings per share history.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.