Hyundai Bng Steel (KRX:004560) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Hyundai Bng Steel Co., Ltd. (KRX:004560) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hyundai Bng Steel

What Is Hyundai Bng Steel's Net Debt?

As you can see below, Hyundai Bng Steel had ₩120.9b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have ₩142.7b in cash offsetting this, leading to net cash of ₩21.8b.

How Healthy Is Hyundai Bng Steel's Balance Sheet?

The latest balance sheet data shows that Hyundai Bng Steel had liabilities of ₩107.5b due within a year, and liabilities of ₩106.1b falling due after that. Offsetting this, it had ₩142.7b in cash and ₩146.9b in receivables that were due within 12 months. So it can boast ₩76.0b more liquid assets than total liabilities.

This surplus liquidity suggests that Hyundai Bng Steel's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Hyundai Bng Steel has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Hyundai Bng Steel grew its EBIT by 16% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hyundai Bng Steel will need earnings to service that debt. 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 Hyundai Bng Steel 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. Over the last three years, Hyundai Bng Steel recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Hyundai Bng Steel has net cash of ₩21.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₩51b, being 96% of its EBIT. When it comes to Hyundai Bng Steel's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 instance, we've identified 3 warning signs for Hyundai Bng Steel that 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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