Is Hyundai Mipo Dockyard (KRX:010620) A Risky Investment?

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.' 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. Importantly, Hyundai Mipo Dockyard Co., Ltd. (KRX:010620) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hyundai Mipo Dockyard

How Much Debt Does Hyundai Mipo Dockyard Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Hyundai Mipo Dockyard had debt of ₩268.6b, up from ₩215.4b in one year. But on the other hand it also has ₩748.5b in cash, leading to a ₩479.9b net cash position.

How Strong Is Hyundai Mipo Dockyard's Balance Sheet?

According to the last reported balance sheet, Hyundai Mipo Dockyard had liabilities of ₩1.10t due within 12 months, and liabilities of ₩41.5b due beyond 12 months. Offsetting this, it had ₩748.5b in cash and ₩95.6b in receivables that were due within 12 months. So it has liabilities totalling ₩294.9b more than its cash and near-term receivables, combined.

Of course, Hyundai Mipo Dockyard has a market capitalization of ₩1.85t, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Hyundai Mipo Dockyard boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Hyundai Mipo Dockyard saw its EBIT drop by 4.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hyundai Mipo Dockyard'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. While Hyundai Mipo Dockyard 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 three years, Hyundai Mipo Dockyard saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While Hyundai Mipo Dockyard does have more liabilities than liquid assets, it also has net cash of ₩479.9b. So we are not troubled with Hyundai Mipo Dockyard's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Hyundai Mipo Dockyard that you should be aware of.

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. 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.
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