Is Hanwha Ocean (KRX:042660) Using Debt Sensibly?

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.' 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. We note that Hanwha Ocean Co., Ltd. (KRX:042660) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hanwha Ocean

What Is Hanwha Ocean's Debt?

As you can see below, Hanwha Ocean had ₩2.19t of debt at December 2023, down from ₩2.72t a year prior. However, it does have ₩1.92t in cash offsetting this, leading to net debt of about ₩266.9b.

A Look At Hanwha Ocean's Liabilities

Zooming in on the latest balance sheet data, we can see that Hanwha Ocean had liabilities of ₩7.46t due within 12 months and liabilities of ₩2.17t due beyond that. Offsetting this, it had ₩1.92t in cash and ₩331.4b in receivables that were due within 12 months. So it has liabilities totalling ₩7.38t more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩8.01t. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Hanwha Ocean's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Hanwha Ocean wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to ₩7.4t. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Hanwha Ocean managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at ₩156b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled ₩2.1t in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 2 warning signs for Hanwha Ocean you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.