Is Hyundai Rotem (KRX:064350) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Hyundai Rotem Company (KRX:064350) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hyundai Rotem

What Is Hyundai Rotem's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Hyundai Rotem had ₩1.18t of debt in June 2020, down from ₩1.47t, one year before. However, because it has a cash reserve of ₩556.9b, its net debt is less, at about ₩623.9b.

How Healthy Is Hyundai Rotem's Balance Sheet?

We can see from the most recent balance sheet that Hyundai Rotem had liabilities of ₩2.12t falling due within a year, and liabilities of ₩892.8b due beyond that. On the other hand, it had cash of ₩556.9b and ₩360.8b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩2.10t.

Given this deficit is actually higher than the company's market capitalization of ₩1.63t, we think shareholders really should watch Hyundai Rotem'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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Hyundai Rotem 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.

Over 12 months, Hyundai Rotem reported revenue of ₩2.6t, which is a gain of 3.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Hyundai Rotem produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩206b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through ₩44b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hyundai Rotem is showing 1 warning sign in our investment analysis , you should know about...

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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