Is HyosungONBCo.Ltd (KOSDAQ:097870) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 HyosungONBCo.,Ltd (KOSDAQ:097870) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

See our latest analysis for HyosungONBCo.Ltd

How Much Debt Does HyosungONBCo.Ltd Carry?

As you can see below, HyosungONBCo.Ltd had ₩8.62b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩15.5b in cash offsetting this, leading to net cash of ₩6.89b.

A Look At HyosungONBCo.Ltd's Liabilities

We can see from the most recent balance sheet that HyosungONBCo.Ltd had liabilities of ₩12.6b falling due within a year, and liabilities of ₩1.55b due beyond that. Offsetting this, it had ₩15.5b in cash and ₩18.5b in receivables that were due within 12 months. So it can boast ₩19.8b more liquid assets than total liabilities.

This luscious liquidity implies that HyosungONBCo.Ltd's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, HyosungONBCo.Ltd boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, HyosungONBCo.Ltd grew its EBIT by 69% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is HyosungONBCo.Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While HyosungONBCo.Ltd 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. Looking at the most recent three years, HyosungONBCo.Ltd recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case HyosungONBCo.Ltd has ₩6.89b in net cash and a decent-looking balance sheet. And we liked the look of last year's 69% year-on-year EBIT growth. So we don't think HyosungONBCo.Ltd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for HyosungONBCo.Ltd that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com