Is Hyundai Rotem (KRX:064350) Using Too Much 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Hyundai Rotem Company (KRX:064350) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hyundai Rotem

How Much Debt Does Hyundai Rotem Carry?

You can click the graphic below for the historical numbers, but it shows that Hyundai Rotem had ₩938.1b of debt in September 2020, down from ₩1.57t, one year before. However, it does have ₩341.7b in cash offsetting this, leading to net debt of about ₩596.4b.

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 ₩507.0b due beyond that. On the other hand, it had cash of ₩341.7b and ₩360.2b worth of receivables due within a year. So its liabilities total ₩1.93t more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩2.27t, so it does suggest shareholders should keep an eye on Hyundai Rotem's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. 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 4.2%, 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. Indeed, it lost ₩78b at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of ₩157b into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Hyundai Rotem is showing 2 warning signs in our investment analysis , you should know about...

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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