We Think Hyundai Livart Furniture (KRX:079430) Can Stay On Top Of Its Debt

Warren Buffett famously said, '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. We can see that Hyundai Livart Furniture Company Limited (KRX:079430) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 Livart Furniture

How Much Debt Does Hyundai Livart Furniture Carry?

As you can see below, at the end of September 2020, Hyundai Livart Furniture had ₩20.7b of debt, up from ₩1.96b a year ago. Click the image for more detail. But on the other hand it also has ₩39.6b in cash, leading to a ₩19.0b net cash position.

How Strong Is Hyundai Livart Furniture's Balance Sheet?

According to the last reported balance sheet, Hyundai Livart Furniture had liabilities of ₩263.7b due within 12 months, and liabilities of ₩69.3b due beyond 12 months. Offsetting these obligations, it had cash of ₩39.6b as well as receivables valued at ₩231.9b due within 12 months. So its liabilities total ₩61.5b more than the combination of its cash and short-term receivables.

Since publicly traded Hyundai Livart Furniture shares are worth a total of ₩333.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Hyundai Livart Furniture boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Hyundai Livart Furniture grew its EBIT at 15% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hyundai Livart Furniture'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Hyundai Livart Furniture may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Hyundai Livart Furniture recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

Although Hyundai Livart Furniture's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩19.0b. And it also grew its EBIT by 15% over the last year. So we are not troubled with Hyundai Livart Furniture's debt use. 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 Livart Furniture is showing 1 warning sign in our investment analysis , you should know about...

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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