Here's Why HD Hyundai Heavy IndustriesLtd (KRX:329180) Has A Meaningful Debt Burden

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. We can see that HD Hyundai Heavy Industries Co.,Ltd. (KRX:329180) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 HD Hyundai Heavy IndustriesLtd

How Much Debt Does HD Hyundai Heavy IndustriesLtd Carry?

The chart below, which you can click on for greater detail, shows that HD Hyundai Heavy IndustriesLtd had ₩2.78t in debt in March 2024; about the same as the year before. On the flip side, it has ₩859.6b in cash leading to net debt of about ₩1.92t.

A Look At HD Hyundai Heavy IndustriesLtd's Liabilities

The latest balance sheet data shows that HD Hyundai Heavy IndustriesLtd had liabilities of ₩10t due within a year, and liabilities of ₩1.82t falling due after that. Offsetting these obligations, it had cash of ₩859.6b as well as receivables valued at ₩1.38t due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩9.96t.

This deficit isn't so bad because HD Hyundai Heavy IndustriesLtd is worth a massive ₩19t, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

HD Hyundai Heavy IndustriesLtd has a debt to EBITDA ratio of 3.6 and its EBIT covered its interest expense 2.5 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. One redeeming factor for HD Hyundai Heavy IndustriesLtd is that it turned last year's EBIT loss into a gain of ₩242b, over the last twelve months. 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 HD Hyundai Heavy IndustriesLtd can strengthen its balance sheet over time. 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. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, HD Hyundai Heavy IndustriesLtd burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

We'd go so far as to say HD Hyundai Heavy IndustriesLtd's conversion of EBIT to free cash flow was disappointing. But at least its EBIT growth rate is not so bad. Overall, we think it's fair to say that HD Hyundai Heavy IndustriesLtd has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. Over time, share prices tend to follow earnings per share, so if you're interested in HD Hyundai Heavy IndustriesLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.