Is Hyundai Steel (KRX:004020) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Hyundai Steel Company (KRX:004020) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Hyundai Steel

What Is Hyundai Steel's Debt?

The chart below, which you can click on for greater detail, shows that Hyundai Steel had ₩9.94t in debt in September 2024; about the same as the year before. On the flip side, it has ₩2.17t in cash leading to net debt of about ₩7.77t.

A Look At Hyundai Steel's Liabilities

According to the last reported balance sheet, Hyundai Steel had liabilities of ₩7.26t due within 12 months, and liabilities of ₩7.39t due beyond 12 months. On the other hand, it had cash of ₩2.17t and ₩2.72t worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩9.76t.

The deficiency here weighs heavily on the ₩2.85t company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Hyundai Steel would probably need a major re-capitalization if its creditors were to demand repayment. 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 Steel'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.

In the last year Hyundai Steel had a loss before interest and tax, and actually shrunk its revenue by 8.0%, to ₩24t. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Hyundai Steel produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at ₩24b. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of ₩193b in the last year. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Hyundai Steel has 2 warning signs (and 1 which is significant) we think you should know about.

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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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.