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.' 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. We note that Hyundai Rotem Company (KRX:064350) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

We've discovered 2 warning signs about Hyundai Rotem. View them for free.

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 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Hyundai Rotem's Net Debt?

As you can see below, Hyundai Rotem had ₩324.9b of debt at December 2024, down from ₩581.4b a year prior. However, its balance sheet shows it holds ₩744.9b in cash, so it actually has ₩419.9b net cash.

How Healthy Is Hyundai Rotem's Balance Sheet?

According to the last reported balance sheet, Hyundai Rotem had liabilities of ₩3.02t due within 12 months, and liabilities of ₩256.5b due beyond 12 months. Offsetting these obligations, it had cash of ₩744.9b as well as receivables valued at ₩969.4b due within 12 months. So its liabilities total ₩1.56t more than the combination of its cash and short-term receivables.

Since publicly traded Hyundai Rotem shares are worth a total of ₩12t, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Hyundai Rotem also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Hyundai Rotem

Better yet, Hyundai Rotem grew its EBIT by 117% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Hyundai Rotem'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 Rotem 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 Rotem actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Hyundai Rotem's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩419.9b. The cherry on top was that in converted 166% of that EBIT to free cash flow, bringing in ₩32b. So is Hyundai Rotem's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Hyundai Rotem you should be aware of, and 1 of them is significant.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.