We Think HD Korea Shipbuilding & Offshore Engineering (KRX:009540) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies HD Korea Shipbuilding & Offshore Engineering Co., Ltd. (KRX:009540) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for HD Korea Shipbuilding & Offshore Engineering

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

The image below, which you can click on for greater detail, shows that HD Korea Shipbuilding & Offshore Engineering had debt of ₩3.36t at the end of March 2024, a reduction from ₩3.79t over a year. However, its balance sheet shows it holds ₩4.65t in cash, so it actually has ₩1.30t 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 ₩18t due within 12 months and liabilities of ₩2.38t due beyond that. Offsetting this, it had ₩4.65t in cash and ₩1.44t in receivables that were due within 12 months. So it has liabilities totalling ₩14t more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of ₩12t, we think shareholders really should watch HD Korea Shipbuilding & Offshore Engineering's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that HD Korea Shipbuilding & Offshore Engineering has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Even more impressive was the fact that HD Korea Shipbuilding & Offshore Engineering grew its EBIT by 1,734% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. 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 HD Korea Shipbuilding & Offshore Engineering does have more liabilities than liquid assets, it also has net cash of ₩1.30t. And it impressed us with free cash flow of ₩1.2t, being 328% of its EBIT. So we don't have any problem with HD Korea Shipbuilding & Offshore Engineering's use of debt. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com