Hyundai Green FoodLtd (KRX:005440) Seems To Use Debt Quite Sensibly

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. As with many other companies Hyundai Green Food Co.,Ltd. (KRX:005440) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Hyundai Green FoodLtd

How Much Debt Does Hyundai Green FoodLtd Carry?

As you can see below, Hyundai Green FoodLtd had ₩89.4b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds ₩425.6b in cash, so it actually has ₩336.2b net cash.

A Look At Hyundai Green FoodLtd's Liabilities

According to the last reported balance sheet, Hyundai Green FoodLtd had liabilities of ₩569.2b due within 12 months, and liabilities of ₩364.3b due beyond 12 months. On the other hand, it had cash of ₩425.6b and ₩466.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩41.8b.

Since publicly traded Hyundai Green FoodLtd shares are worth a total of ₩841.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Hyundai Green FoodLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Hyundai Green FoodLtd's load is not too heavy, because its EBIT was down 24% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Green FoodLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Hyundai Green FoodLtd 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. In the last three years, Hyundai Green FoodLtd's free cash flow amounted to 37% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hyundai Green FoodLtd has ₩336.2b in net cash. So we are not troubled with Hyundai Green FoodLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Hyundai Green FoodLtd (1 is concerning!) that you should be aware of before investing here.

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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