HYUNDAI BIOLANDLtd (KOSDAQ:052260) Takes On Some Risk With Its Use Of 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. We can see that HYUNDAI BIOLAND Co.,Ltd (KOSDAQ:052260) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for HYUNDAI BIOLANDLtd

How Much Debt Does HYUNDAI BIOLANDLtd Carry?

As you can see below, at the end of September 2020, HYUNDAI BIOLANDLtd had ₩43.6b of debt, up from ₩40.0b a year ago. Click the image for more detail. However, it also had ₩11.5b in cash, and so its net debt is ₩32.1b.

A Look At HYUNDAI BIOLANDLtd's Liabilities

The latest balance sheet data shows that HYUNDAI BIOLANDLtd had liabilities of ₩27.6b due within a year, and liabilities of ₩27.7b falling due after that. Offsetting these obligations, it had cash of ₩11.5b as well as receivables valued at ₩12.7b due within 12 months. So its liabilities total ₩31.1b more than the combination of its cash and short-term receivables.

Since publicly traded HYUNDAI BIOLANDLtd shares are worth a total of ₩360.0b, 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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).

We'd say that HYUNDAI BIOLANDLtd's moderate net debt to EBITDA ratio ( being 2.3), indicates prudence when it comes to debt. And its strong interest cover of 10.2 times, makes us even more comfortable. Shareholders should be aware that HYUNDAI BIOLANDLtd's EBIT was down 47% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is HYUNDAI BIOLANDLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last three years, HYUNDAI BIOLANDLtd burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, HYUNDAI BIOLANDLtd's conversion of EBIT to free cash flow left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its interest cover is a good sign, and makes us more optimistic. Once we consider all the factors above, together, it seems to us that HYUNDAI BIOLANDLtd's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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. For instance, we've identified 3 warning signs for HYUNDAI BIOLANDLtd (1 doesn't sit too well with us) you should be aware of.

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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